Question:
Suppose the market for avocado faces two simultaneous events. When there is a severe drought affecting the supply of avocado, findings of a research reported that avocado contains medicinal properties which may help avoiding cancer. How will these two events affect the equilibrium price and equilibrium quantity?
(1) Eq Price: Increases; Eq Quantity: Decreases
(2) Eq Price: Increases; Eq Quantity: Increases
(3) Eq Price: Decreases; Eq Quantity: Decreases
(4) Eq Price: Increases; Eq Quantity: Indeterminate
(5) Eq Price: Decreases; Eq Quantity: Indeterminate
Correct Answer:
(4)
Answer Explanation:
A drought decreases supply (shifts left), pushing price up and quantity down. Medical findings increase demand (shifts right), pushing both price and quantity up. Both events push the price up, so Price definitely increases. However, they push quantity in opposite directions, making the final effect on Quantity indeterminate without knowing the exact magnitude of the shifts.
Topic: Market Equilibrium Year: 2021
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