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Question
Microeconomics
Posted 17 days ago

In which of the following scenarios would we definitely know that price will increase but we'd be unable to determine how quantity changes?

Choose 1 answer:
(A) DD \downarrow and SS \downarrow
(B) DD \uparrow and SS \downarrow
(c) DD \uparrow and SS no change
(D) DD \uparrow and SS \uparrow
(E) DD \downarrow and SS \uparrow
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Answer from Sia
Posted 17 days ago
Solution
a
When both demand (DD) and supply (SS) decrease (DD \downarrow and SS \downarrow), the effect on price is ambiguous because both shifts cause the equilibrium quantity to decrease, but the effect on price depends on the relative magnitudes of the shifts
b
When demand increases (DD \uparrow) and supply decreases (SS \downarrow), the price will definitely increase because an increase in demand raises the price and a decrease in supply also raises the price. However, the effect on quantity is indeterminate because an increase in demand raises the quantity while a decrease in supply lowers the quantity
c
When demand increases (DD \uparrow) and supply remains unchanged (SS no change), both the price and quantity will increase
d
When both demand (DD) and supply (SS) increase (DD \uparrow and SS \uparrow), the effect on price is ambiguous because an increase in demand raises the price while an increase in supply lowers the price. The effect on quantity is an increase
e
When demand decreases (DD \downarrow) and supply increases (SS \uparrow), the price will definitely decrease because a decrease in demand lowers the price and an increase in supply also lowers the price. However, the effect on quantity is indeterminate because a decrease in demand lowers the quantity while an increase in supply raises the quantity
Answer
(B) DD \uparrow and SS \downarrow
Key Concept
Simultaneous shifts in demand and supply can lead to indeterminate changes in quantity while having a definite effect on price.
Explanation
When demand increases and supply decreases, the price will definitely increase because both shifts push the price in the same direction. However, the effect on quantity is indeterminate because the increase in demand raises the quantity while the decrease in supply lowers the quantity.

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