Question

What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you

Answer 1

Answer:

Please refer attachment as well as diagram attached.

Explanation:

Peanuts is a major raw material in the production of peanut butter. When the price of peanuts rise, the cost of production of peanut butter increases. Hence, suppliers are discouraged and supply curve will shift to the left from S to S1.

Jelly is a complementary good to peanut butter. Complementary products are those which are bought and consumed together, such as a phone and charger or a toothbrush and toothpaste. Complementary products have an inverse relationship. When the price of jelly falls, the demand for peanut butter increases. Hence, the demand curve will shift right from D to D1.

If fewer firms decided to produce peanut butter, it will cause a decline in the supply, leading the supply curve to shift further to the left from S1 to S2.

Health officials announcing that peanut butter is good for health will be a motivation for people to consume more peanut butter. Hence the demand for peanut butter will increase and the quantity demanded will shift further right from D1 to D2.

It has been assumed both demand and supply make equal shifts and that PES is equal to PED for peanut butter. Thus, as depicted in the diagram, the quantity of peanut butter will remain the same (Q1), however, the price would rise dramatically from P1 to P2.