If a producer can use its factors of production to produce either good A or good B, then a rise in the price of A
A) increases the supply of B.
B) decreases the supply of A.
C) increases the supply of A.
D) decreases the supply of B.
E) both C and D.
The correct answer and explanation is :
The correct answer is E) both C and D.
Explanation:
When a producer has the ability to use its factors of production (land, labor, capital) to produce either Good A or Good B, the decision about which good to produce depends on the prices of those goods in the market. The price of Good A has a direct effect on the producer’s incentive to allocate more resources toward producing Good A, which impacts the supply of Good A and Good B.
Here’s how it works:
- Rise in the price of Good A:
When the price of Good A rises, it makes the production of Good A more profitable for the producer