Question

Suppose the market for thick, heavy, hot wool socks is in long run equilibrium. Now suppose the greenhouse effect kicks in with a vengeance raising average temperatures all over the planet. In the short run you predict:

a.higher prices and greater output of wool socks.

b.increased profits for wool sock firms.

c.lower prices, lower quantities and higher profits for wool sock firms.

d.lower prices, lower quantities and losses for wool sock firms.e.lower prices, lower quantities and zero profits for wool sock firms.

Answer 1

Ans.-(D)

When the average temperature rises all ove the planet , demand for hot wool socks will fall. As a result, demand curve shifts to the left and equilibrium price and quantity falls. Firms will incur a loss as they won't be able to sell their stock.