Question

Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to:
A) rise, the supply of bread to increase, and the demand for potatoes to increase.
B) rise, the supply of bread to decrease, and the demand for potatoes to increase.
C) rise, the supply of bread to decrease, and the demand for potatoes to decrease.
D) fall, the supply of bread to increase, and the demand for potatoes to increase.

Answer 1

Answer:

The correct answer is option B.

Explanation:

Because of drought, the supply of wheat will decline. This will cause the supply curve to move to the left. As a result, the price of wheat will increase.  

Wheat is used as an input in the production of bread. The rise in the price of wheat will lead to an increase in the cost of producing bread. This increase in the cost of production will lead to a decline in supply.  

The reduction in the supply of bread will move the supply curve to the left. This will further cause an increase in the price of bread. As potato is a substitute good for bread, an increase in the price of bread will cause the demand for potatoes to rise.