Refer to the figure below: Let supply remain constant at S; an increase in the price of a substitute good causes consumers to be willing and able to buy 150 more units of the good at each price in the list than they were when demand was D.Which of the following statements is (are)true?

Question

Refer to the figure below:  Let supply remain constant at S; an increase in the price of a substitute good causes consumers to be willing and able to buy 150 more units of the good at each price in the list than they were when demand was D.Which of the following statements is (are)true?

Quizplus · Accepted Answer

With the increase in the price of a substitute good, the demand for the given good will increase. This means that the demand curve will shift to the right from D to D'.

At the original equilibrium point E, where supply curve S intersects demand curve D, the quantity demanded is Q=$400 and the price is P=$7.

With the increase in demand by 150 units at each price, the demand curve will shift to the right to D'. The new equilibrium point will be E', where supply curve S intersects demand curve D'.

At the new equilibrium point E', the quantity demanded will be Q=$450 and the price will be P=$6. Therefore, Choice C is true.

At point E, there will be excess supply because the quantity supplied is more than the quantity demanded. With the increase in demand, the excess supply will reduce but it will not completely disappear. Therefore, there will still be a shortage of 150 units at price P=$7. Hence, Choice A is also true.

Therefore, both choices A and D are true, making choice E the correct answer.

Refer to the Figure Below: Let Supply Remain Constant