Question

Forest fires have inflicted significant damage to a region, leaving several paper mills destroyed in their wake. As such, the supply of paper in the region has been significantly reduced. Without government intervention, which of the following is likely to occur?(1 point)

A temporary shortage of paper will be remedied as consumers bid up prices, and paper production increases due to the rising profits associated with higher prices.

A surplus of paper will persist unless government action is taken to decrease paper production in the region.

A shortage of paper will persist indefinitely unless government action is taken to increase paper production in the region.

A temporary surplus of paper will be remedied as consumers bid down prices, and paper production decreases due to the loss of profits associated with falling prices.

Answer 1

A temporary shortage of paper will be remedied as consumers bid up prices, and paper production increases due to the rising profits associated with higher prices.

Explanation: the supply shock creates a shortage at the original price; higher prices ration some demand and provide profit incentives for increased production or entry, moving the market toward a new equilibrium.