Scenario: the Rare Earth Element Neodymium Is One of the Essential

Multiple Choice

Scenario: The rare earth element neodymium is one of the essential ingredients in the magnets used in computer hard drives and loudspeakers, among many other devices. The figures below shows a hypothetical pictures of supply and demand for neodymium, loudspeakers, and computer hard drives. The latter two are accompanied by the pictures of cost curves for a typical firm in those markets. Initially, all markets are in the long-run equilibrium at the prices shown. Then a surge in demand for loudspeakers takes place due to a rapidly increasing popularity of hi-fidelity audio equipment in China. This will cause a change in the loudspeaker market (Step 1) , which in turn causes a change in the neodymium market (Step 2) , which will cause a change in the hard drive market and the loudspeaker market (Step 3) , and so on.

-Refer to the scenario above.Taking into account the initial reaction in the loudspeaker market in Step 1,what is expected to happen in the neodymium market (in Step 2) ?

A) Demand will increase, and the equilibrium price will rise.
B) Demand will increase, and the equilibrium price will fall.
C) Supply will increase, and the equilibrium price will rise.
D) Supply will increase, and the equilibrium price will fall.