38. Chapter 4 What would happen to the equilibrium price and quantity of peanut butter if...

38. Chapter 4

What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly (a complementary good) increased, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was bad for you? Explain why.

	a.	price will fall and the effect on quantity is ambiguous
	b.	price will rise and the effect on quantity is ambiguous
	c.	quantity will fall and the effect on price is ambiguous
	d.	quantity will rise and the effect on price is ambiguous

Expert Solution

Answer
option c.

quantity will fall and the effect on price is ambiguous

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There are four effects
1. if the price of peanuts went up
It is input so the increase in the price of input decreases supply which increases price and decreases the quantity

2. the price of jelly (a complementary good) increased
The increase in the price of a complementary good decreases the demand which decreases both price and quantity.

3. fewer firms decided to produce peanut butter
The reduction in the producers reduces the supply and shifts the supply curve to the left which decreases the quantity and increases the price.

4. health officials announced that eating peanut butter was bad for you
It decreases demand and shifts the demand curve to the left which decreases both price and quantity.

in total quantity decreases in each effect but in two effects price decreases and in two price increases so the effect on price is ambiguous

Rahul Sunny answered 1 year ago

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