Multiple Choice
In the context of market equilibrium, what does the intersection between the demand and supply curves represent?
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3. The Market Forces of Supply and Demand
Market Equilibrium
Multiple Choice
Which of the following can cause the market equilibrium price of peanut butter to increase?
A
A decrease in the supply of peanuts, a key input for peanut butter
B
An improvement in technology that lowers production costs for peanut butter
C
An increase in the price of jelly, a complementary good
D
A decrease in consumer income, assuming peanut butter is a normal good
Verified step by step guidance1
Step 1: Understand the concept of market equilibrium price, which is determined by the intersection of supply and demand curves in the market for peanut butter.
Step 2: Analyze how a decrease in the supply of peanuts, a key input for peanut butter, affects the supply curve for peanut butter. Since peanuts are an input, a decrease in their supply raises production costs, shifting the supply curve for peanut butter to the left (a decrease in supply). This typically causes the equilibrium price to increase.
Step 3: Consider the effect of an improvement in technology that lowers production costs for peanut butter. This would shift the supply curve to the right (an increase in supply), which tends to lower the equilibrium price, not increase it.
Step 4: Evaluate the impact of an increase in the price of jelly, a complementary good. Since jelly and peanut butter are consumed together, a higher price for jelly may reduce demand for peanut butter, shifting the demand curve leftward and lowering the equilibrium price.
Step 5: Examine the effect of a decrease in consumer income assuming peanut butter is a normal good. A decrease in income reduces demand for normal goods, shifting the demand curve for peanut butter to the left, which tends to lower the equilibrium price.
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