Question

What would happen to the equilibrium price and quantity of lattés if the cost to produce steamed milk, which is used to make lattés, increased, and scientists discovered that lattés cause heart attacks?
a) Both the equilibrium price and quantity would increase
b) Both the equilibrium price and quantity would decrease.
c) The equilibrium price would decrease, and the effect on equilibrium quantity would be ambiguous.
d) The equilibrium quantity would decrease, and the effect on equilbrium price would be ambiguous.

Answer 1

The equilibrium price would decrease, and the effect on equilibrium quantity would be ambiguous.

Explanation:

If demand falls and supply declines, the quantity of balance may decline, and the price of balance can increase, decline, or stay the same. If demand declines and output stays the same, the quantity of balance declines and the price of balance decreases.

Decreased demand and decreased production could contribute to a decrease in the price of balance, but the impact on the quantity of balance can not be calculated.

Consumers often put a lower premium on the product for every amount, so suppliers are able to tolerate a lower demand; thus, the output should decline.