The market for corn in country A is highly competitive. At the current market pr

Question

The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually, the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, led the media to conclude that the price of corn in country A would soon be as high as $10/bushel.

This reasoning is flawed because it assumes that

A. country A has more substitutes of corn than country B.

B. corn is the staple diet in both countries.

C. identical market supply implies equal productivity of all producers within one country.

D. both are open economies.

E. similar tastes and preferences translate into similar willingness and ability to pay.

Explanation / Answer

Answer : Option E is correct. The reasoning is flawed that similar taste and preferences translate into similar Willingness and ability to pay. It means that similar is compare to identical supply when they are both exactly same this led to increase in the price of country A when country B prices increases.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.