Suppliers produce two goods, cheese and butter. Assume that there is no cost to switch resources...
Suppliers produce two goods, cheese and butter. Assume
that there is no cost to switch resources from cheese production to
butter production and vice versa. Suppose the demand for butter
increases. What do we expect to happen to the equilibrium in the
market for cheese?
Homework Answers
Suppliers produce two goods. So, if the price of butter increases , then suppliers shift their resources from cheese production to butter production . And therefore, the supply of cheese will decline. Therefore supply curve for cheese shifts leftward . As a result, equilibrium price of cheese rises and equilibrium quantity of cheese will decrease.
This is shown in the below figure:
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