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Questions are based on the demand and supply diagrams in Figure. In the given figure, D1 and S1 are the original demand and supply curves D2,D3,S2 and S3 are possible new demand and supply curves. Starting from initial equilibrium point (1) what point on the graph most likely to result from each change?
→Suppose wage rate of coal mineral increases and price of natural gas decreases. (coal and natural gas are substitutes), what point in the figure is most likely to be the equilibrium price and quantity?
- Point 6
- Point 4
- Point 3
- Point 2
→Suppose wage rate of coal mineral increases and price of natural gas decreases. (coal and natural gas are substitutes), what point in the figure is most likely to be the equilibrium price and quantity?
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Demand decreases because price of natural gas decreases and there is a direct relation between the price and demand of two substitute goods. Supply also decreases because cost of factors of production (wages) increases. Thus, Point 4 marks the new equilibrium point.
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