If supply decreases and demand increases
A) the market clearing price definitely rises, and the equilibrium quantity falls.
B) the market clearing price definitely rises, and the equilibrium quantity is indeterminate.
C) the market clearing price definitely falls, and the effect on the equilibrium quantity is indeterminate.
D) the effect on the market clearing price is indeterminate, and the equilibrium quantity definitely falls.

Question

Quizplus · Accepted Answer

When supply decreases, the price tends to increase because there are fewer goods available. When demand increases, the price also tends to increase because more people want the goods. Therefore, the market clearing price definitely rises. However, the effect on the equilibrium quantity is indeterminate without knowing the relative magnitudes of the supply decrease and demand increase.

If Supply Decreases and Demand Increases