Consider the market for cheese. If the price of milk increases, what is the most likely consequence in the cheese market?

• A. The supply of cheese increases, causing the equilibrium price to fall and equilibrium quantity to rise.
• B. The demand for cheese increases, resulting in a higher equilibrium price and higher equilibrium quantity.
• C. The demand for cheese decreases, leading to a lower equilibrium price and lower equilibrium quantity.
• D. The supply of cheese decreases, leading to a higher equilibrium price and lower equilibrium quantity.

Answer: (D)

Verified step by step guidance

1. Identify the relationship between milk and cheese production: Milk is a key input in producing cheese, so an increase in the price of milk raises the production cost of cheese.
2. Understand how an increase in production cost affects supply: When production costs rise, producers are less willing or able to supply the same quantity at each price, causing the supply curve to shift leftward (a decrease in supply).
3. Analyze the supply shift impact on the market: A leftward shift in the supply curve means that at every price, less cheese is supplied, which tends to increase the equilibrium price and reduce the equilibrium quantity.
4. Consider the demand side: Since the problem does not indicate any change in consumer preferences or income, the demand curve for cheese remains unchanged.
5. Combine the effects to determine the new equilibrium: With demand constant and supply decreasing, the new equilibrium will have a higher price and a lower quantity of cheese traded in the market.