Answer to Question #75344 in Economics of Enterprise for bryan

Question

If there is an increase in the price of red meat, a substitute in production for milk, then:
a) The supply of milk will increase.
b) The demand for milk will decrease.
c) The supply of milk will decrease.
d) There will be a movement along the supply curve for milk.

Answer 1

First of all we should understand if the above question is given when the prices of the other substitutes of red meat are fixed. In this case the right answer should be c) - The supply of milk will decrease. The producer of milk will face the increase of production costs that is why he or she will cut the supply of milk in the market.
On the other point of view there can be no changes in supply side. Such situation occurs if the producer finds the substitute product other than red meat. In this case he/she will not face an increase in production costs and so will continue to work without any changes!
There can be situation when producer can find cheaper substitute to red meat as the input of production. For this case the right answer can also be a) the supply of milk will increase. In this case production costs will go down and the producer will increase the supply of milk.