What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and (2) the cost of milk, an input in cream cheese production, rises?

• A. Equilibrium price rises, equilibrium quantity falls
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

Answer: (D)

Verified step by step guidance

1. Identify the two main events affecting the cream cheese market: a decrease in the price of butter (a substitute) and an increase in the cost of milk (an input).
2. Analyze the effect of the decrease in the price of butter: As the price of a substitute (butter) falls, the demand for cream cheese is likely to decrease because consumers may switch to the cheaper substitute.
3. Consider the impact of the increase in the cost of milk: As the cost of an input (milk) rises, the supply of cream cheese is likely to decrease because it becomes more expensive to produce.
4. Combine the effects on demand and supply: A decrease in demand tends to lower the equilibrium price and quantity, while a decrease in supply tends to raise the equilibrium price and lower the equilibrium quantity.
5. Determine the overall impact on equilibrium: The equilibrium quantity will definitely fall due to both decreased demand and supply. However, the effect on equilibrium price is ambiguous because the decrease in demand and decrease in supply have opposing effects on price.