Question

You love peanut butter and you can't live without it. You hear on the news that 50 percent of the peanut crop in the South has been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result:________. a. your demand for peanut butter will increase, but not until the end of the year. b. your demand for peanut butter increases today. c. your demand for peanut butter decreases as you look for a substitute good. d. your demand for peanut butter shifts left today.

Answer 1

Answer:

b. your demand for peanut butter increases today.

Explanation:

Your demand for peanut butter increases today because you will expect two things to happen: 1) peanut butter will become more scarce in the future because of the drought 2) as a result of the increased scarcity, peanut butter will also be more expensive in the future.

Because of those two rational expectations, you will try to buy as much peanut butter as you can today, effectively increasing your demand for that good.