Question

Which of the following statements is (are) correct?

Select one:

A. A strong demand increase together with a weaker supply decrease would necessarily result in a higher price and an increase in equilibrium quantity.  

B. A weak demand decrease together with a stronger supply increase would necessarily result in a lower price and an increase in equilibrium quantity.  

C. A weak demand increase together with a stronger supply increase would necessarily result in a lower price and an increase in equilibrium quantity.

D. All of the above

E. A and B, only

Values of quantity supplied and quantity demanded for specific prices in a particular market are listed. The quantity demanded at the price of $28 is 1,000 units. At the price of $26, the quantity demanded is 1,300 units and at the price of $24 the quantity demanded is 1,600 units. The quantity supplied at the price of $28 is 1,500 units. At the price of $26, the quantity supplied is 1,300 units and at the price of $24 the quantity supplied is 1,100 units. (Hint: you may find it helpful to draw the graph). Which of the following statements is (are) correct?

(x)   If the actual market price was $24, then a shortage of 500 units would exist and the price would rise to $26, but not to $28.

(y)   If the actual market price was $28, then a surplus of 500 units would exist and price would fall to $26, but not to $24

(z)   If the actual price was either $28 or $24, then the market would not be in equilibrium and less than 1,300 units would be sold.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (z) only

Answer 1

(1) (D)

A demand increase will increase price and increase quantity. A demand decrease will decrease price and decrease quantity. A supply increase will decrease price and increase quantity. A supply decrease will increase price and decrease quantity. So,

(i) When Demand increase in strong and supply decrease in weak, price is higher and quantity is higher (A is correct)

(ii) When Demand decrease in weak and supply increase in strong, price is lower and quantity is higher (B is correct)

(iii) When Demand increase in weak and supply increase in strong, price is lower and quantity is higher (B is correct).

(2) (A)

Equilibrium is at price of $26 since quantity demanded (Qd) and quantity supplied (Qs) are equal (= 1,300).

When Price = $24, Qd = 1,600 and Qs = 1,100, so Shortage = Qd - Qs = 1,600 - 1,100 = 500 (x is correct).

When Price = $28, Qd = 1,000 and Qs = 1,500, so Surplus = Qs - Qd = 1,500 - 1,000 = 500 (y is correct).

When price is $24, quantity traded will fall to 1,100 (< 1,300) and when price is $28, quantity traded is 1,000 (< 1,300) (z is correct).