Suppose buyers expect the price of Good A to increase next week. At the same time, production costs for Good A are increasing. Accordingly, the equilibrium price of Good A _ and the equilibrium quantity of Good A _.
Answera.
a increases; decreases
b.increases; is indeterminate
c.increases; increases
d.decreases; is indeterminate
e.is indeterminate; increases
The correct answer and explanation is:
The correct answer is a. increases; decreases.
Here’s an explanation:
When buyers expect the price of Good A to increase in the future, they are likely to increase their demand for the good in the present. This increase in demand is driven by the expectation that buying now will allow them to avoid paying a higher price later. As a result, the demand curve for Good A shifts to the right.
At the same time, an increase in production costs for Good A makes it more expensive for producers to produce the good. This causes the supply curve to shift to the left, as producers are now less willing or able to supply the same quantity of Good A at the same price. The increase in production costs reduces the overall supply of Good A in the market.
The combined effect of these two shifts (an increase in demand and a decrease in supply) leads to a higher equilibrium price. The increased demand pushes the price upward, while the decreased supply also pushes the price upward.
However, the equilibrium quantity is more difficult to predict. The demand curve is shifting to the right, which would normally increase the equilibrium quantity. But the supply curve is shifting to the left, which would reduce the equilibrium quantity. The final impact on the equilibrium quantity depends on the relative magnitude of these two shifts. If the shift in demand is larger than the shift in supply, the quantity could increase. If the shift in supply is larger than the shift in demand, the quantity could decrease. Therefore, the change in equilibrium quantity is indeterminate.
In summary, while the price of Good A will definitely increase due to both higher demand and lower supply, the effect on the equilibrium quantity depends on the size of the shifts in demand and supply, making it indeterminate.