Question

An ad 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?

Answer 1

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

Explanation:

When there is a situation in which the supply and the demand for any product is equal then it is said to be Equilibrium quantity. When there is an intersection where the supply and demand curves meets each other it give rise to the state of equilibrium.

In the given example, there are two cases such as the price of the milk will rise which is published in newspaper and the production efficiency of the milk is improved with a new and improved pasteurization process. From these two effects we can conclude that Equilibrium quantity will increase; the effect on price is ambiguous.