Question

Case Case 4 Suppose the price of cream, a key ingredient of ice cream, has gone down. What is the effect of this event on the market for ice cream? Referring to the 4 cases depicted on the graphs above, use the 3-step method to answer the following questions: 1. This event primarily affects the side of the market. 2. The effect is 3. The applicable case is . . Comparing the old and the new equilibrium we conclude that the price of ice cream is likely to • and the quantity of ice cream traded is likely to Check

Answer 1

Usually when the input price decreases the cost of production falls. A fall in cost brings more profit to the producers at the prevailing price. Here the cream is an input in the production of Ice Cream. The fall in its price increase the supply of Ice Cream in the market. The supply curve of Ice Cream shift to the right. This lowers ceteris paribus the equilibrium price and the equilibrium quantity of Ice Cream traded increases.

1. This event primarily affects the supply side of the market.

2. The effect is an increase in supply of Ice Cream.

3. The applicable case is the case 3. Comparing the old and the new equilibrium we conclude that the price of Ice Cream is likely to decrease and the quantity of Ice Cream traded is likely to increase.