If an increase in the cost of production leads suppliers to offer less at every price level, how will this affect the market equilibrium price and quantity?

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Equilibrium price increases, equilibrium quantity decreases

Equilibrium price decreases, equilibrium quantity increases

Equilibrium price remains unchanged, equilibrium quantity increases

Equilibrium price increases, equilibrium quantity remains unchanged

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Answer

When production costs rise, each firm can supply less at every price, so the supply curve shifts to the left. The new supply intersects the unchanged demand curve at a higher price and a lower quantity. Think of a bakery that now spends more on flour; it can bake fewer cakes, so the price people pay goes up while the number of cakes sold falls. Thus, the market equilibrium price rises and the equilibrium quantity falls.

Detailed Explanation

When suppliers face higher costs, they produce less. Other options are incorrect because The idea that a higher cost makes the price drop is wrong; Keeping the price the same while supply drops is impossible.

Key Concepts

market equilibrium

demand and supply interaction

Topic

Shifts in Supply Curve

Difficulty

medium level question

Cognitive Level

understand

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