Question

You have been hired as a strategic consultant, to make the prediction of what will happen in the private medical consultation market if in the last year the technology for medical diagnoses and treatments has increased considerably, but the average income of regular patients has decreased in about 10% (Ceteris Paribus, and a normal good). Specifically, you are asked to determine what will happen to the equilibrium price and quantity in the market?

a) The equilibrium price will decrease and the equilibrium quantity we cannot determine what happens to it.

b) The equilibrium price will increase and the equilibrium quantity will decrease.

c) The equilibrium price cannot be determined and the equilibrium quantity will decrease.

d) The equilibrium price will increase and the equilibrium quantity will also increase.

Answer 1

If the technology for medical diagnoses and treatments has increased considerably, the supply will increase. That is, the supply curve will shift rightward in the market of private medical consultation.

On the other hand, since the average income of regular patients has decreased in about 10%, the demand will decrease (in case of normal goods, income and demand have a postive relation). That is, the demand curve will shift leftward in the market of private medical consultation.

At the intersection of new demand and supply curves, the equilibrium price will definitely decrease but the effect on quantity is ambiguous. If increase in supply > decrease in demand, equilibrium quantity will increase. If increase in supply < decrease in demand, equilibrium quantity will decrease. If increase in supply = decrease in demand, equilibrium quantity will remain unchanged.

The correct answer is: (A) The equilibrium price will decrease and the equilibrium quantity we cannot determine what happens to it.