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(Demand and Supply) What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers
(Demand and Supply) What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers. (Hint: You must state which curve is affected and how, what happens to the equilibrium price and equilibrium quantity describing either a fall or rise.)
a. The price of dairy cow fodder increases.
b. The price of beef decreases.
c. Concerns rise about the fat content of ice cream. Simultaneously, the price of sugar (used to produce ice cream) increases.
Expert Solution
a. An increase in cow fodder increases the production costs of ice cream. This shifts the supply curve to the left, increasing the price of ice cream and decreasing the quantity.
b. If the price of beef decreases ice cream producers lose revenue. They have to increase prices in ice cream to overcompensate for the loss. This shifts the supply curve left, increasing the price of ice cream and decreasing the quantity.
c. If concerns come up about the fat content of ice cream consumers will demand less. This shifts the demand curve left, decreasing the quantity and the price. If the price of sugar increases this increases the cost of production of ice cream. This shifts the supply curve left, increasing the price of ice cream and further decreasing the quantity. The total effect on price is ambiguous, but the quantity decreases.
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