In the Greenville Ice Cream Market this month, we learned (i) that creamy and mi
ID: 1143078 • Letter: I
Question
In the Greenville Ice Cream Market this month, we learned (i) that creamy and milk prices were abnormally low and (ii) that Simply Natural Creamery opened another store in town. After these two effects, what were the net effects on equilibrium prices and quantities?A. Price up, Quantity up B. Price up, Quantity down C. Price down, Quantity up D. Price down, Quantity down E. Price Ambiguous, Quantity up F. Price Ambigious, Quantity down G. Price up, Quantity Ambiguous H. Price down, Quantity Ambiguous I. Both Price and Quantity Ambiguous In the Greenville Ice Cream Market this month, we learned (i) that creamy and milk prices were abnormally low and (ii) that Simply Natural Creamery opened another store in town. After these two effects, what were the net effects on equilibrium prices and quantities?
A. Price up, Quantity up B. Price up, Quantity down C. Price down, Quantity up D. Price down, Quantity down E. Price Ambiguous, Quantity up F. Price Ambigious, Quantity down G. Price up, Quantity Ambiguous H. Price down, Quantity Ambiguous I. Both Price and Quantity Ambiguous
A. Price up, Quantity up B. Price up, Quantity down C. Price down, Quantity up D. Price down, Quantity down E. Price Ambiguous, Quantity up F. Price Ambigious, Quantity down G. Price up, Quantity Ambiguous H. Price down, Quantity Ambiguous I. Both Price and Quantity Ambiguous A. Price up, Quantity up B. Price up, Quantity down C. Price down, Quantity up D. Price down, Quantity down E. Price Ambiguous, Quantity up F. Price Ambigious, Quantity down G. Price up, Quantity Ambiguous H. Price down, Quantity Ambiguous I. Both Price and Quantity Ambiguous
Explanation / Answer
Abnormally low prices of cream and milk will reduce the cost of producing ice cream.
This will increase the profit-margin of ice cream producers and will induce them to increase production and thereby supply.
Secondly, opening of another store by the ice cream shop will increase the number of sellers in the market which also increase the supply.
So, supply of ice cream in the Greenville ice cream market will increase.
Given the demand for ice cream, this increase in supply of ice cream will lead to fall in equilibrium price and the increase in the equilibrium quantity.
Hence, the correct answer is the option (C).