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? aSupply will shift leftward, increasing the equilibrium price and decreasing the equilibrium quantity of lemonade. bSupply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade. cDemand will shift leftward, decreasing the equilibrium price and decreasing the equilibrium quantity of lemonade. dSupply will shift rightward, decreasing the equilibrium price and increasing the equilibrium quantity of lemonade. eDemand will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade.
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? aSupply will shift leftward, increasing the equilibrium price and decreasing the equilibrium quantity of lemonade. bSupply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade. cDemand will shift leftward, decreasing the equilibrium price and decreasing the equilibrium quantity of lemonade. dSupply will shift rightward, decreasing the equilibrium price and increasing the equilibrium quantity of lemonade. eDemand will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade.
Solution
The answer is d. Supply will shift rightward, decreasing the equilibrium price and increasing the equilibrium quantity of lemonade.
Here's why:
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Lemons are a key ingredient in lemonade. If the price of lemons decreases, it becomes cheaper for producers to make lemonade.
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As a result, producers are willing and able to produce more lemonade at each and every price level. This is represented by a rightward shift of the supply curve in the lemonade market.
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In a perfectly competitive market, an increase in supply (rightward shift of the supply curve) leads to a decrease in the equilibrium price and an increase in the equilibrium quantity.
So, the decrease in the price of lemons leads to a decrease in the price of lemonade and an increase in the quantity of lemonade sold.
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