Answer to Question #24580 in Microeconomics for saad

Question

If silk shirt buyers think that the price of those shirts will increase over the next month, then when they originally had this expectation (before the price actually rose, if it will at all - remember that expectations can be wrong) in the market for silk shirts the most likely effect would be:


A. P* up, Q* down


B. P* up, Q* up


C. P* down, Q* down


D. P* down, Q* up


E. A movement to the right along the demand curve.

Answer 1

B. P* up, Q* up
Change in expectations about the future will affect demand. Optimism or pessimism about the future direction of the economy, including expected natural disasters and inflation, can affect the spending patterns of consumers. When consumers expect the price of a good to rise or fall, those expectations will affect their current spending, thus affecting demand for the good.