Question

81. Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and potatoes are a consumer substitute for bread, we would expect the price of wheat to: A. rise, the supply of bread to increase, and the demand for potatoes to increase. B. rise, the supply of bread to decrease, and the demand for potatoes to increase. C. rise, the supply of bread to decrease, and the demand for potatoes to decrease. D. fall, the supply of bread to increase, and the demand for potatoes to increase. 82. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to: A. decrease the demand for Z. B. increase the demand for Z. C. have no effect on the demand for Z. D. decrease the supply of Z.

Answer 1

81. The drought will cause the supply of wheat of to decrease and it will put upward pressure on the prices of wheat, the supply curve of the wheat will shift upward. Since wheat is considered as an input for the production of bread , an increase in the price of wheat increases the cost of production for the bread. The bread making firm will compensate the increased cost by cutting down the production and this makes the price of bread to rise. The substitute goods have a positive price elasticity of demand that is an increase in the price of wheat increase the demand for potatoes the substitute good.

Ans: B). Rise, the supply of bread to decrease , and the demand for the potatoes to increase.

82. An increase in the input X makes the production of the good Y more costly and this will force the firm to cut the production of good Y. As the supply decreases the price of the good Y will increase and this will increase the demand for the substitute good Z.

Ans: B. Increase the demand for Z.