Chocolate Ice Cream Production and Cocoa Prices Impact
How does an increase in cocoa prices affect the cost of producing chocolate ice cream?
a. It increases the cost of producing chocolate ice cream by 10 percent.
What is the impact of this cost increase on the equilibrium price and quantity of chocolate ice cream?
b. The equilibrium price of chocolate ice cream ____________, while the equilibrium quantity ____________.
Answer:
An increase in cocoa prices increases the cost of producing chocolate ice cream by 10 percent. This cost increase affects the equilibrium price and quantity of chocolate ice cream.
Explanation:
When cocoa prices rise, the cost of producing chocolate ice cream also increases by 10 percent. This cost increase impacts the supply of chocolate ice cream in the market.
Due to the higher production cost, the supply curve for chocolate ice cream shifts to the left. This means that producers are now willing to supply less chocolate ice cream at every price point compared to before.
As a result of the leftward shift in the supply curve, the equilibrium price of chocolate ice cream rises. This increase in price is a response to the decreased supply resulting from the higher production costs. Additionally, the equilibrium quantity of chocolate ice cream decreases due to the higher price.