Answer to Question #310192 in Microeconomics for joseph

Question

Wheat and oats are used to make different types of breakfast cereal and both are grown on the prairies. Use appropriate diagrams in your answers.

a. What would happen to the supply and demand of oats if the price of wheat were to fall? What happens to the equilibrium price and quantity of oats?

b. What would happen to the equilibrium price of wheat and oats if there was a drought in the prairies?

Answer 1

a) Wheats and oats are substitute products. If the price of wheats fall, the supply and demand of oat will reduce. This is because fall in the price of wheat will lead to a general reduction in price of the cereals made by wheat, this eventually leads to many consumers buying wheat cereals and leaving behind oat cereals. Therefore, the demand for oat will reduce and also the supply will reduce. The equilibrium price and quantity of oat will reduce.

b) Drought in prairies will lead to shortage of both wheat and oats. This will lead to an increase in price of both the products. Therefore, the equilibrium quantity will reduce since there is shortage while there will be an increase in price of both the wheat and oats.