Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks?
Part 2
I.
The demand for soft drinks decreases.
II.
The quantity of soft drinks demanded decreases.
III.
The supply of soft drinks decreases.
IV.
The quantity of soft drinks supplied decreases.
Part 3
A.
IV only
B.
I and IV.
C.
III only.
D.
II and III.
D. II and III.
The correct answer is B. I and IV.
When the cost of aluminum used by soft-drink companies increases, it makes the production of canned soft drinks more expensive. As a result, the soft drink companies may choose to produce less, leading to a decrease in the quantity of soft drinks supplied (IV). Additionally, consumers may be less willing to buy soft drinks at higher prices, leading to a decrease in the demand for soft drinks (I). Thus, both I and IV correctly describe the resulting effects in the market for canned soft drinks.
To determine the correct answer, we need to understand the relationship between the cost of aluminum and the market for canned soft drinks.
When the cost of aluminum used by soft-drink companies increases, it would affect the cost of production for these companies. The increased cost of aluminum would mean higher production costs for canned soft drinks. This has two main effects on the market:
1. Demand: The higher cost of production is likely to be passed on to consumers in the form of higher prices for canned soft drinks. This increase in price could lead to a decrease in the demand for soft drinks, as consumers may choose to purchase alternative beverages or reduce their consumption due to the higher prices. Therefore, statement I - "The demand for soft drinks decreases" is correct.
2. Supply: Higher production costs may also discourage soft-drink companies from producing as much as they did before, resulting in a decrease in the supply of soft drinks. Therefore, statement III - "The supply of soft drinks decreases" is also correct.
Now, let's consider the quantity demanded and supplied:
3. Quantity Demanded: The increase in price due to higher production costs could lead to a decrease in the quantity of soft drinks demanded. This is because, with higher prices, some consumers may be unwilling or unable to purchase the same amount of soft drinks as before. Therefore, statement II - "The quantity of soft drinks demanded decreases" is correct.
4. Quantity Supplied: The decrease in the supply of soft drinks could result in a decrease in the quantity of soft drinks supplied. Soft-drink companies may choose to produce fewer cans of their product due to the increased costs of production. Therefore, statement IV - "The quantity of soft drinks supplied decreases" is also correct.
Considering all these effects, the correct answer is B - "I and IV," as both statement I and statement IV accurately describe the resulting effects in the market for canned soft drinks.