What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2) tornadoes ravages the Midwest, where wheat is grown?

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

Answer: (B)

Verified step by step guidance

1. Identify the factors affecting the supply of wheat: An increase in the cost of fertilizer raises production costs, leading to a decrease in the supply of wheat. Tornadoes in the Midwest also reduce the supply by damaging crops.
2. Analyze the supply curve: Both the increase in fertilizer costs and the tornadoes cause the supply curve for wheat to shift to the left, indicating a decrease in supply.
3. Consider the demand curve: Assume the demand for wheat remains constant, as the problem does not mention any changes in demand.
4. Determine the impact on equilibrium price: With a leftward shift in the supply curve and constant demand, the equilibrium price of wheat will rise due to the reduced supply.
5. Evaluate the impact on equilibrium quantity: The decrease in supply leads to a lower equilibrium quantity of wheat in the market, as less wheat is available for sale.