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

Since demand has increased by 150 units at each price level, the new demand curve (D') will be parallel to the original demand curve (D) but shifted upwards by 150 units. This is shown in the diagram as D'.

At the original equilibrium price ($5), there will now be excess demand (shortage) of 150 units (Q1-Qd). This is because the new quantity demanded (Q1) is higher than the original quantity supplied (Qs). Therefore, statement A is true.

However, this shortage will lead to an increase in the market price as consumers compete to purchase the limited quantity of the good available. As the price rises, some consumers will now find the good too expensive and will switch to the substitute good, reducing demand. This process will continue until a new equilibrium is reached where the quantity demanded equals the quantity supplied.

The new equilibrium will occur at the intersection of the new demand curve (D') and the original supply curve (S), which is at a price of $6 and a quantity of 450. This is illustrated in the diagram as point E. Therefore, statement C is also true.

At this new equilibrium, the quantity demanded is higher than the original quantity demanded but lower than the new quantity demanded at the original price ($5). The price is higher than the original equilibrium price but lower than the new price that would be required to clear the market at the new quantity demanded ($7). Therefore, statement D is also true.

Since both statement A and statement D are true, the correct answer is E.

Refer to the Figure Below: Let Supply Remain Constant