Question

Suppose that lower production costs increases the supply of wheat, such that more wheat is supplied at each price level. The new equilibrium quantity (after the increase in supply) is _____.

A)600
B)800

Answer 1

As shown on the graph, the "demand" and "new supply" lines intersect at 800.

Answer 2

Economic theory tells us that in an open market with perfect capital mobility, the equilibrium price is given by the interaction between supply and demand for a good. This point of equilibrium occurs when the supply and demand curves intersect.

In the exercise, initially the supply and demand curves intersect where the price is $ 4 and the quantity demanded is 600. If the cost of production has decreased, the producer can lower the price. If price decreases, demand usually increases, creating a new break-even point. In the case, the price has decreased to $ 3 and demand has increased to 800, which is our answer.