How would the equilibrium quantity of bottled water be affected if the price of plastic used to make bottles for bottled water decreased at the same time that the price of soft drinks decreased tremendously?A.The change would be indeterminate.B.It would decrease.C.There would be no change.D.It would increase.
Question
How would the equilibrium quantity of bottled water be affected if the price of plastic used to make bottles for bottled water decreased at the same time that the price of soft drinks decreased tremendously?A.The change would be indeterminate.B.It would decrease.C.There would be no change.D.It would increase.
Solution
The equilibrium quantity of bottled water would be affected by two simultaneous changes: a decrease in the price of plastic used to make bottles and a decrease in the price of soft drinks.
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If the price of plastic used to make bottles decreases, the cost of production for bottled water decreases. This would lead to an increase in the supply of bottled water, as producers can now produce more at the same cost.
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On the other hand, if the price of soft drinks decreases tremendously, consumers may switch from bottled water to soft drinks because they are now relatively cheaper. This would lead to a decrease in the demand for bottled water.
The overall effect on the equilibrium quantity of bottled water depends on the relative magnitudes of these two effects. If the increase in supply due to the decrease in production costs is larger than the decrease in demand due to the price decrease of soft drinks, the equilibrium quantity of bottled water would increase. If the decrease in demand is larger, the equilibrium quantity would decrease. If the two effects are equal, the equilibrium quantity would remain the same.
Therefore, the correct answer is A. The change would be indeterminate, as it depends on the relative magnitudes of the increase in supply and the decrease in demand.
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