Which of the following best describes the sequences of events that lead to a price increase and quantity decrease when supply decreases? Choose 1 answer: (A) When supply decreases, there is a surplus because $Q_{S}Q_{D}$ at the old price. Price will adjust upward until the market clears at a new lower quantity. (D) When supply decreases, there is a shortage because $Q_{S}Q_{D}$ at the old price. Price will adjust upward until the market clears at a new lower quantity.

Question

Which of the following best describes the sequences of events that lead to a price increase and quantity decrease when supply decreases? Choose 1 answer: (A) When supply decreases, there is a surplus because $Q_{S}Q_{D}$ at the old price. Price will adjust upward until the market clears at a new lower quantity. (D) When supply decreases, there is a shortage because $Q_{S}>Q_{D}$ at the old price. Price will adjust upward until the market clears at a new lower quantity.

Accepted Answer

∻Solution∻ ‖ a ⋮ Supply Decrease: When supply decreases, the supply curve shifts to the left. This means that at the old price, the quantity supplied ($Q_S$) is less than the quantity demanded ($Q_D$). ‖ ‖ b ⋮ Shortage Creation: Because $Q_S < Q_D$ at the old price, a shortage occurs in the market. ‖ ‖ c ⋮ Price Adjustment: To eliminate the shortage, the price will adjust upward. As the price increases, the quantity demanded will decrease, and the quantity supplied will increase until the market reaches a new equilibrium. ‖ ‖ d ⋮ New Equilibrium: The market clears at a new equilibrium where the quantity is lower than before, but the price is higher. ‖ ∻Answer∻ ⚹ (B) When supply decreases, there is a shortage because $Q_{S}

Sia