When an Unusually Bad Frost Reduces the Apple Crop in Washington

question 447

Multiple Choice

When an unusually bad frost reduces the apple crop in Washington state, the price of canned apple juice may rise immediately in supermarkets, even though the juice on the shelves was made from last year's plentiful crop. The invisible hand theory tells us that the profit-seeking merchants who raise their prices in such situations

• A) are hurting the economy, since the juice now on the shelves was produced at a lower cost.
• B) are profiting by rationing the juice, which is now more scarce to the consumers willing to pay the most for the now more limited supply.
• C) are ignoring the motivating function of prices, which the invisible hand theory holds should be set according to the cost paid by the merchant.
• D) will not actually profit since they are ignoring a basic economic rule: Only raise prices when consumer demand increases.

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