The Following Two Graphs Depict the Equilibrium Price of a Pound

question 134

Multiple Choice

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions.

-Suppose the price of a pound of flax seed is currently $1.20 in both Kentucky and West Virginia. Further, suppose there is a decrease in demand for flax seed in Kentucky but not in West Virginia. Before flax seed sellers are able to adjust the relative quantity of flax seed supplied in the two states, the decrease in demand causes the equilibrium price of a pound of flax seed in Kentucky to change by $0.20. The law of one price suggests that the price of a pound of flax seed be ________ in West Virginia after sellers adjust the relative quantity of flax seed supplied in the two states.

• A) $1.00
• B) between $1.20 and $1.00
• C) between $1.00 and $0.80
• D) less than $0.80
• E) higher than $1.20

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Definitions:

Adjusting Entries

Journal entries made at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred.