Question:
In a competitive market if both demand and supply increase, what will be the effect on the equilibrium price and quantity?
(1) The price will definitely increase but the quantity could either increase, decrease, or remain the same.
(2) The quantity will definitely increase but the price could either rise, fall or remain the same.
(3) The quantity will definitely decrease but the price could either rise, fall or remain the same.
(4) The price will definitely decrease but the quantity could either increase, decrease, or remain the same.
(5) Both the price and the quantity will definitely increase.
Correct Answer:
(2)
Answer Explanation:
When both demand and supply shift to the right (increase), they both act to push the equilibrium quantity higher. However, they have opposing effects on price: increased demand raises the price, while increased supply lowers it. Without knowing the exact magnitudes of the shifts, the final price change is indeterminate.
Topic: Market Equilibrium Year: 2020
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