Demand and Supply for Grapes

The following tables show the demand and supply for grapes. Demand is uncertain, with D1 and D2 each occurring 50% of the time. Suppliers must base their decisions on the expected price and must sell all grapes they bring to the market at the going market price.

-If suppliers have rational expectations,what will be their expected price of grapes?
A) $2.00 per pound.
B) $2.50 per pound.
C) $3.00 per pound.
D) $3.50 per pound.

Question

Demand and Supply for Grapes

The following tables show the demand and supply for grapes. Demand is uncertain, with D1 and D2 each occurring 50% of the time. Suppliers must base their decisions on the expected price and must sell all grapes they bring to the market at the going market price.

-If suppliers have rational expectations,what will be their expected price of grapes?
A) $2.00 per pound. 
B) $2.50 per pound. 
C) $3.00 per pound. 
D) $3.50 per pound.

Quizplus · Accepted Answer

Rational expectations result in suppliers predicting prices based on the best available information. Based on the historical prices given, a rational expectation for suppliers would be to anticipate a price of $2.50 per pound for grapes.