Question

An add in the newspaper claims that the price of milk will increase next week . At the same time, a new and improved pasteurization process makes milk production more efficient. Given these two effects, what can we say about the current equilibrium price and quantity of milk? 1. Equilibrium price will increase; the effect on quantity is ambiguous. 2. Equilibrium price will decrease; the effect on quantity is ambiguous. 3. Equilibrium quantity will decrease, equilibrium price will increase. 4. Equilibrium quantity will increase; the effect on price is ambiguous.

Answer 1

Answer:

Equilibrium quantity will increase; the effect on price is ambiguous.

Explanation:

An add in the newspaper claims that the price of milk will increase next week . At the same time, a new and improved pasteurization process makes milk production more efficient. Given these two effects, we can say about the current equilibrium price and quantity of milk that Equilibrium quantity will increase; the effect on price is ambiguous.

The conclusion that equilibrium quantity will increase is dependent on the fact that expectation on future prices is a major factor that leads to changes in demand

People’s expectations about the future can have a significant impact on demand. Or, more specifically, their expectations of future prices can change demand.

If consumers expect prices to increase shortly, current demand often increases, i.e., the demand curve shifts to the right.