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)

Question

Responses

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 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 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.
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.

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

Answer 1

The correct response is:

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.

In the context of reduced supply due to the destruction of paper mills from forest fires, the market will experience a shortage of paper. As consumers demand more paper than is available, prices will naturally increase. The higher prices will incentivize remaining paper producers (if any) to increase production or encourage new entrants to the market, ultimately helping to resolve the shortage over time as supply adjusts to meet demand.