Question

A 2014 study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America.

a. Suppose a severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. Indicate the possible effects on demand, supply, or both, as well as the equilibrium price and quantity of chocolate ice cream.

Answer 1

Since cream is a key input in the production of ice cream, a shortage of it or a price increase will cause the supply curve to shift to the left. This means that the suppliers will supply less product and charge a higher price for ice cream.

Since the quantity supplied of ice cream will decrease at all price levels, this will result in shortage and:

• the equilibrium price will increase
• the equilibrium quantity will decrease
• the quantity demanded for ice cream in general (including chocolate ice cream) will decrease also.