Question

Assume that the market for lemonade is perfectly competitive and currently in equilibrium. Lemons are key ingredients in lemonade. If the price of lemons decreases, how will the lemonade market be affected?


Supply will shift leftward, increasing the equilibrium price and decreasing the equilibrium quantity of lemonade.

Option A,Supply will shift leftward, increasing the equilibrium price and decreasing the equilibrium quantity of lemonade.

a

Supply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade.

Option B,Supply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade.

b

Supply will shift rightward, decreasing the equilibrium price and increasing the equilibrium quantity of lemonade.

Option C,Supply will shift rightward, decreasing the equilibrium price and increasing the equilibrium quantity of lemonade.

c

Demand will shift leftward, decreasing the equilibrium price and decreasing the equilibrium quantity of lemonade.

Option D,Demand will shift leftward, decreasing the equilibrium price and decreasing the equilibrium quantity of lemonade.

d

Demand will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade.

Answer 1

Option C.

A fall in the price of a key input (lemons) lowers firms' costs, so the supply curve for lemonade shifts right. With downward‑sloping demand, the new equilibrium has a lower price and a higher quantity.