Chapter 1. eFigure 2.15
eFigure
Isoquants
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You must read each slide, and complete any questions on the slide, in sequence.
Question 1 of 4
Question 1.
Under circumstances in which both supply and demand curves are shifting, we know that we can identify the direction of the change of either price or quantity with certainty, but not both. For what combination of changes would price fall and the change in quantity be ambiguous?
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Correct! An inward shift in demand leads to a decrease in price and a decrease in quantity. An outward shift of supply leads to a decrease in price and an increase in quantity. Both shifts lead to a decrease in price, so we know with certainty that price falls. The two shifts result in changes in quantity in opposite directions. Accordingly, we cannot identify the direction of the change in quantity. Depending on the magnitude of the shift of the two curves, the new equilibrium quantity may be larger, smaller or equal to the initial quantity.
Incorrect. An inward shift in demand leads to a decrease in price and a decrease in quantity. An outward shift of supply leads to a decrease in price and an increase in quantity. Both shifts lead to a decrease in price, so we know with certainty that price falls. The two shifts result in changes in quantity in opposite directions. Accordingly, we cannot identify the direction of the change in quantity. Depending on the magnitude of the shift of the two curves, the new equilibrium quantity may be larger, smaller or equal to the initial quantity.