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Assume the market for pencils is competitive and originally in equilibrium
Assume the market for pencils is competitive and originally in equilibrium. As a result of an increase in the price of graphite, the supply of pencils decreases. What is true of the new equilibrium?
A. The price is higher while the quantity exchanged decreases.
B. The price is higher and the quantity exchanged increases.
C. The price is lower and the quantity exchanged decreases.
D. The price is lower while the quantity exchanged increases.
Expert Solution
Option (A) the price is higher while the quantity exchanged decreases is correct
Graphite, which is used as a factor of production, has now become more expensive to use. So, the producers will reduce the overall production of pencils. Hence, the supply curve of the pencils will shift to the left, and the price rise, but the quantity exchanged decreases.
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