Assume that the following changes occur in the market for ice-cream: (i) the pri

Question

Assume that the following changes occur in the market for ice-cream: (i) the price of frozen yogurt (which consumers tend to buy more of when ice-cream gets more expensive) increases, (ii) the price of the milk that is needed to make ice-cream decreases, (ii) the weather gets hotter because of global warming, and (iv) the technology used to make ice-cream becomes more efficient and less wasteful. Which of the following predictions follow from the theory of supply and demand? o a. The market demand for ice-cream will shift right and the market supply of ice-cream will shift left. As a result, the price of ice-cream will increase and the quantity of ice-cream bought and sold may increase or decrease increase and the quantity of ice-cream bought and sold will increase increase or decrease and the quantity of ice-cream bought and sold will increase o b. The market demand for ice-cream will shift right and the market supply of ice-cream will shift right. As a result, the price of ice-cream will O c. The market demand for ice-cream will shift right and the market supply of ice-cream will shift right. As a result, the price of ice-cream may d. The market demand for ice-cream will shift left and the market supply of ice-cream will shift right. As a result, the price of ice-cream will decrease and the quantity of ice-cream bought and sold may increase or decrease

Explanation / Answer

Ans

C is right. Due to hot climate and increase in price of yogurt the demand for ice creams rise. On the other hand decrease in price of milk and efficient technology reduces cost and shifts supply rightwards. So output rise but price may rise or decrease depending on which curve shifted more. If supply shifted more price will fall. If demand shifted more price will rise

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