Question

Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on the equillibrium price and quantity of oranges.

Answer 1

Answer:

The correct answer is - equilibrium price will be ambiguous and increase in equilibrium quantity.

Explanation:

The news of the finding about the consuming oranges will be beneficial for health and decreases the risk of diabetes will increase the demand for the oranges. An increase in the demand will result in increase in the price and quantity of oranges.

The supply of the oranges will increase due to the fertilizer that increase the productivity of the oranges and which increases the quantity even more but decrease in price.

Thus, the correct answer is - the equilibrium price will be ambiguous and increase in equilibrium quantity.