Question

3. Steak and chicken are substitutes. A sharp reduction in the supply of steak would

a. increase consumer surplus in the market for steak and decrease producer surplus in the market for chicken.

b. increase consumer surplus in the market for steak and increase producer surplus in the market for chicken.

c. decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.

d. decrease consumer surplus in the market for steak and decrease producer surplus in the market for chicken.

Answer 1

3. As steak and chicken are substitutes. A sharp reduction in the supply of steak would cause the supply curve for steak to shift leftward from S1 to S2 and the economy moves from point B to point E, the equilibrium price of steak increases from P1 to P2 and the equilibrium quantity of steak decreases from Q1 to Q2. Consumer surplus is the area below the demand curve and above the price. As the supply of steak declines, the consumer surplus decreases from the area of triangle OAB to the area of triangle OED. ( panel 1)

  Now as steak and chicken are substitutes of each other, a sharp decline in the supply of steaks will increase the demand for for chicken as consumers will substitute steaks with chicken and the demand curve shifts rightward from D1 to D2 and as the economy moves from point R to point Z, the equilibrium price of chicken increases from P1 to P2 and the equilibrium quantity of chicken increases from Q1 to Q2. Now producer surplus is the area above the supply curve and below the price. Thus as the demand for chicken increases, producer surplus increases from the area of the triangle VRT to the area of the triangle OZT ( panel2). Hence the answer will be:

c. decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.