Question

Wool and cotton can both be used to manufacture clothing in the garment industry. Suppose that bad weather destroys cotton crops at the same time that the price of wool increases significantly. What is likely to be the impact on the market for cotton?

a. a decrease in both the equilibrium price and the quantity sold

b. an increase in the equilibrium price and a decrease in the quantity sold

c. an increase in both the equilibrium price and the quantity sold

d.  an uncertain effect on the equilibrium quantity but an increase in the equilibrium price

e. none of the above

NOTE: Please explain each step clearly so I can understand the steps not just see answers.

Answer 1

Answer - Option D

No effect upon the equilibrium quantity but increase in equilibrium price

As a result of bad weather , the supply will reduce and the supply curve will shift to left . As the price of wool rises , the demand for cotton will increase as both are substitute goods. Hence supply of cotton falls and demand for cotton rises. The combined effect of these is the rise in equilibrium price. Since in case of decrease in supply quantity will fall and in case of rise in demand quantity will rise. Hence the overall effect will be no change in equilibrium quantity. Hence Option D will be correct.