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Question
Microeconomics
Posted 2 months ago

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 QS<QDQ_{S}<Q_{D} at the old price. Price will adjust upward until the market clears at a new lower quantity.
(B) When supply decreases, there is a surplus because QS>QDQ_{S}>Q_{D} at the old price. Price will adjust upward until the market clears at a new lower quantity.
(C) When supply decreases, the price increases automatically to make QS=QDQ_{S}=Q_{D}
(D) When supply decreases, there is a shortage because QS>QDQ_{S}>Q_{D} at the old price. Price will adjust upward until the market clears at a new lower quantity.
(E) When supply decreases, there is a shortage because QS<QDQ_{S}<Q_{D} at the old price. Price will adjust upward until the market clears at a new lower quantity.
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Answer from Sia
Posted 2 months ago
Solution
a
Supply Decrease: When supply decreases, the supply curve shifts to the left. This creates a situation where the quantity supplied (QSQ_S) is less than the quantity demanded (QDQ_D) at the old equilibrium price
b
Shortage Creation: This mismatch between QSQ_S and QDQ_D at the old price creates a shortage in the market
c
Price Adjustment: Due to the shortage, the price will adjust upward. As the price increases, the quantity demanded will decrease, and the quantity supplied will increase until a new equilibrium is reached
d
New Equilibrium: The market will clear at a new higher price and a lower quantity compared to the original equilibrium
Answer
(E) When supply decreases, there is a shortage because QS<QDQ_{S}<Q_{D} at the old price. Price will adjust upward until the market clears at a new lower quantity.
Key Concept
Shortage due to supply decrease
Explanation
When supply decreases, the quantity supplied is less than the quantity demanded at the old price, creating a shortage. The price will then increase until the market reaches a new equilibrium with a higher price and lower quantity.

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