In a market economy, the short-run reaction to a shortage of a commodity after an increase in demand will be that:
A)price will fall, but profits will increase.
B)price will rise, but profits decrease.
C)price will rise, but profits remain unchanged.
D)price and profits will both rise.
E)output will fall, but price rises.

Question

Quizplus · Accepted Answer

In a market economy, when demand for a commodity increases leading to a shortage, the price of the commodity typically rises due to the higher demand. As the price rises, assuming costs remain relatively unchanged in the short run, the profits for producers of the commodity also increase. This is because they are able to sell their product at a higher price.

In a Market Economy, the Short-Run Reaction to a Shortage