Question

The price of apples used to make apple pies has decreased. At the same time, people...

The price of apples used to make apple pies has decreased. At the same time, people expect the price of apple pies increase significantly in the future. Given these two effects, what will happen to the current equilibrium quantity and price of apple pies?

a.

Equilibrium quantity will increase; the effect on price is ambiguous.
b.

Equilibrium price will increase; the effect on quantity is ambiguous.
c.

Equilibrium price will decrease; the effect on quantity is ambiguous.
d.

Equilibrium quantity will decrease, equilibrium price will increase.
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Homework Answers

Answer #1

Supply will increase as the cost of production of apple pies has decreased. The supply curve shifts to the right.

If consumers expect the future prices of apple pie to increase, they will stock up now and the demand for apple pies will increase. The demand curve will shift to the right.

When both demand and supply curves shift in the same direction, the equilibrium quantity will increase but the effect on equilibrium price is indeterminate.

Answer is choice a.

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