Consider the market for cupcakes, which is currently in equilibrium. Now, suppose that two events happen simultaneously: (1) the price of sugar, used in the production of cupcakes, decreases and (2) the American Heart Association announces that consumption of excess sugar is extremely dangerous to one's health, reducing the popularity of cupcakes. What effect might these events have on the market for cupcakes?
A) The equilibrium price will fall and the equilibrium quantity will rise.
B) The equilibrium quantity will fall, but the change in the equilibrium price cannot be determined.
C) The equilibrium price will rise and the equilibrium quantity will fall.
D) The equilibrium price will fall, but the change in the equilibrium quantity cannot be determined.

Question

Quizplus · Accepted Answer

The decrease in the price of sugar will lower production costs, shifting the supply curve to the right, which tends to lower the price and increase quantity. However, the decrease in popularity due to health concerns will shift the demand curve to the left, which tends to lower both price and quantity. The net effect on quantity is uncertain because it depends on the relative magnitudes of the shifts in supply and demand, but the equilibrium price will definitely fall.

Consider the Market for Cupcakes, Which Is Currently in Equilibrium