Answer to Question #208544 in Macroeconomics for jawad khan

Question

08. A survey indicated that chocolate is Pakistanis favorite ice cream flavor. For each of the

following, indicate the possible effects on demand, supply, or both as well as equilibrium

price and quantity of chocolate ice cream.

a. A severe drought in the Central Punjab causes dairy farmers to reduce the number of milk-

producing cattle in their herds by a third. These dairy farmers supply cream that is used to

manufacture chocolate ice cream.

b. A new report by the Medical Association reveals that chocolate does, in fact, have significant

health benefits.

c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.

d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing

chocolate ice cream.

Answer 1

a.

The supply of cream will reduce when the herds are reduced shifting the cream supply curve. Consequently, the ice cream market price rises, increasing the unit production cost for chocolate ice cream. As a result, there is a shift of the chocolate ice cream supply curve to the left since for any given price, there is a reduction in the supplied quantity of chocolate ice cream. This results to a decrease in equilibrium quantity and an increase in the equilibrium price.

b. 

Now, consumers demand for chocolate ice cream increases at any given price, making the demand curve to shift rightward. Consequently, both equilibrium quantity and price increases.

 c.

The fall in the price of vanilla ice cream(substitute) makes it wise for the consumers to substitute vanilla ice cream with chocolate ice cream. Therefore, the quantity demanded of chocolate ice cream falls shifting the demand curve leftwards. Both equilibrium quantity and price decreases.

 d.

A fall in ice cream production cost makes manufacturers willing to extend the supply chocolate ice cream at any given price. As a result, the supply curve shifts rightward leading to an increase in equilibrium quantity and a fall in equilibrium price.