Figure 13-14
-Refer to Figure 13-14.Suppose a firm in a competitive market,like the one depicted in panel (a),observes market price rising from P1 to P2.Which of the following could explain this observation?

Question

Figure 13-14  
-Refer to Figure 13-14.Suppose a firm in a competitive market,like the one depicted in panel (a),observes market price rising from P1 to P2.Which of the following could explain this observation?

Quizplus · Accepted Answer

An increase in market demand from D0 to D1 would cause the equilibrium price to rise from P1 to P2, while the other options would not explain this observation. The entry of new firms would likely increase market supply and decrease price, while the exit of existing consumers would decrease market demand and also decrease price. An increase in market supply would also decrease price, as would a decrease in market demand.