Question

 Assume that there is both a demand side and supply side change in the market for apples. On the demand side, the price of bananas decreases. Bananas and apples are substitutes. On the supply side, there is a technological advance in apple production. What happens to equilibrium price and quantity.

 a the equilibrium price of apples rises, and the equilibrium quantity of apples falls

 b. the equilibrium price of apples rises, and the equilibrium quantity of apples rises.

 c. the equilibrium price of apples rises, and the equilibrium quantity of apples is indeterminant

 d. the equilibrium price of apples falls, and the equilibrium quantity of apples is indeterminant

Answer 1

The right answer is D, the equilibrium price of apples falls, and the equilibrium quantity of apples is indeterminant.

Consider first the fall in the price of banana which can be substituted for the apple, so due to the fall in the price of banana will start demanding more of banana and less of apple, therefore, the demand of apple will fall. This will shift the demand curve of apple to the left.

Secondly, due to the advancement in the technology, the apple production will increase which will increase the supply of apple in the market and the result will be a rightward shift in the supply curve of apple.

The equilibrium price of apple will fall for the sure as demand curve shifts to the left and supply curve shifts to the right. Equilibrium quantity is indeterminant because the extent of rise and fall of a quantity of apple depends on the magnitude of the shift in the supply and demand curve of apple.

Answer 2

ANSWER :

4th option.

Price decrease in banana , a substitute of apple, will cause demand curve to shift to the left. Technological advancement in apple production will result in shift of supply curve of apple to shift to the right. These shifts will cause fall in equilibrium price of apple. However, the equilibrium quantity can not determined without knowing the extent of shifts of demand and supply curves.