Suppose the cost of raw materials used by the cotton industry rises to a larger extent compared to the increase in demand in the market.Which of the following situations will arise?

Question

Quizplus · Accepted Answer

The increase in the cost of raw materials will lead to an increase in the cost of production for the cotton industry. If the increase in cost is significant, it may not be viable for low-cost firms to continue their operations. This could lead to a reduction in the supply of cotton, which could lead to a further increase in prices. In such a scenario, the incidence of the higher cost will fall partially on the consumers in the form of higher prices, and partially on the sellers in the form of lower profits. Therefore, the correct answer is D.

Suppose the Cost of Raw Materials Used by the Cotton