Suppose the demand for Maple syrup is price elastic. Then, a decrease in the supply of Maple syrup will
Select one:
A. decrease the equilibrium quantity and decrease consumer spending on Maple syrup.
B. raise the equilibrium price but total consumer spending for Maple syrup will remain unchanged.
C. decrease the equilibrium quantity and lower the price.
D. raise the equilibrium price and increase total consumer spending for Maple syrup.
E. lower the equilibrium price but increase total consumer spending on Maple syrup.
The correct answer and explanation is:
The correct answer is D. raise the equilibrium price and increase total consumer spending for Maple syrup.
Explanation:
When the demand for Maple syrup is price elastic, it means that consumers are sensitive to price changes. A small change in price will lead to a relatively larger change in the quantity demanded. If there is a decrease in the supply of Maple syrup, the supply curve shifts leftward, leading to an increase in the equilibrium price. This is because there is now less syrup available, but consumers are still willing to buy it due to the high responsiveness (elasticity) of demand.
Since the demand is elastic, the increase in price will lead to a proportionally larger decrease in the quantity demanded. However, even though the quantity demanded decreases, total consumer spending will increase. This happens because the percentage increase in price outweighs the percentage decrease in quantity demanded. In other words, while fewer units of syrup are purchased, the higher price for each unit results in a higher total expenditure by consumers.
For example, if the price of Maple syrup rises by 10% and the quantity demanded decreases by 5%, the total amount consumers spend on Maple syrup could still rise because the 10% increase in price compensates for the 5% drop in quantity. The key factor here is the elastic nature of demand, which magnifies the effect of a price increase on total spending.
Thus, in this situation, the equilibrium price rises, and because the demand is elastic, total consumer spending (price multiplied by quantity) increases as well.