According to the law of supply, an increase in the price of butter will, ceteris paribus, lead to:
A A decrease in the supply of butter
B An increase in the supply of butter
C An increase in the quantity supplied of butter
D A decrease in the quantity supplied of butter
The correct answer and explanation is:
The correct answer is C. An increase in the quantity supplied of butter.
According to the law of supply, there is a direct relationship between the price of a good and the quantity supplied. This means that when the price of a good rises, producers are more willing and able to supply more of that good to the market. This happens because higher prices generally allow producers to cover their production costs and make a profit, which incentivizes them to increase the quantity of the good they supply.
In this case, if the price of butter increases, ceteris paribus (i.e., all other factors remain constant), producers will find it more profitable to produce and sell more butter. Therefore, the quantity of butter supplied will increase. This is an example of the basic principle of the law of supply, which holds that an increase in the price of a good leads to an increase in the quantity supplied, not a change in the supply itself.
It is important to differentiate between quantity supplied and supply. An increase in the price of butter affects the quantity supplied, which refers to the amount of butter producers are willing to offer at that specific price point. On the other hand, a change in supply refers to a shift in the entire supply curve, which would occur due to factors other than price, such as changes in production technology, input costs, or government policies.
In summary, when the price of butter rises, the quantity of butter supplied increases, as producers are more motivated to supply more at the higher price, assuming all other factors remain unchanged.