Question

Assume that the price of rubber increased at the same time that Michael Jordan, arguably the best NBA basketball player of all time, became famous. What do you expect to happen to the equilibrium price and equilibrium quantity of the basketball shoes that are promoted by Michael Jordan? A. Equilibrium price will go up and equilibrium quantity will go down. B. Equilibrium price will go up and equilibrium quantity will go up. C. Equilibrium price will go down and equilibrium quantity will be indeterminate. D. Equilibrium price will go down and equilibrium quantity will go up. E. Equilibrium price will go up and equilibrium quantity will be indeterminate.

Answer 1

Answer: Option (E) is correct.

Step-by-step explanation:

The prices of rubber increases and we know that rubber is used as an input for the shoes producer. So, increase in the input prices will reduce the profits of the shoes producers. Hence, they will produce less quantity of shoes and this shifts the supply curve towards left.

On the other hand, shoes are promoted by the famous basketball player. So, this will increase the demand for shoes, therefore, demand curve of shoes shifts rightwards.

Hence, leftward shift of supply curve and rightward shift of demand curve will lead to increase the equilibrium price of shoes but effect on equilibrium quantity is indeterminate because it is depend upon the magnitude of shifts of demand and supply curve.