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For the following multiple choice question the correct answer is (d). Explain why answer (d) is...

For the following multiple choice question the correct answer is (d). Explain why answer (d) is the right answer and explain why each of the other options are not correct.

Which of the following is the correct sequence of events when a free and competitive market is in a surplus situation?

(a) The market price will increase, which will lead to an increase in Qs and a decrease in Qd until the market reaches another equilibrium position where Qs=Qd.

(b) The market price will increase, which will lead to a decrease in Qs and an increase in Qd until the market reaches another equilibrium position where Qs=Qd.

(c) The market price will decrease, which will lead to an increase in Qs and a decrease in Qd until the market reaches another equilibrium position where Qs=Qd.

(d) . The market price will decrease, which will lead to a decrease in Qs and an increase in Qd until the market reaches another equilibrium position where Qs=Qd.

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Answer #1

when a free and competitive market is in a surplus situation,The market price will decrease, which will lead to a decrease in Qs and an increase in Qd until the market reaches another equilibrium position where Qs=Qd. this happens because when there is over production or extra surplus in the economy it means supply is more than demand and as general principle in situation like this price declines and as a result supply also declines( supply and price are directly related) so it reaches a point where supply declines and meets the demand and the new equilibrium takes place where Qs=Qd.

option A and B are not correct because when supply is more than demand the price will decrease and it will not increase and latter price and supply are directly related so if price declines supply is suppose to decline as well. so c is also wrong.

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