Question

The table shows the demand and supply schedules for pretzels A fall in income decreases the quantity demanded by 500 bags a day at each price At the initial equilibrium price, there is a of pretzels. The price of a bag as the market moves to its new equilibrium Price (dollars per bag) 2.50 2.75 3.00 325 3.50 Quantity Quantity demanded supplied (bags of pretzels per day) 2,500 1,500 2.000 2,000 1,500 2,500 1,000 3,000 3,500 500 O A. shortage, falls OB. surplus remains unchanged OC. surplus: rises OD. Surplus, falls O E. shortage, rises The new equilibrium price is $ bags a day a bag and the new equilibrium quantity is Click to select your answer(s)

Answer 1

The given table shows that the quantity demanded equals the quantity supplied corresponding to the price of $2.75 per bag.

So, initially, the equilibrium price is $2.75 per bag and the equilibrium quantity is 2,000 bags.

Now, the quantity demanded decreases by 500 bags at each price due to fall in income.

The revised table is as follows -

Price	Quantity demanded	Quantity supplied
$2.50	2,000	1,500
$2.75	1,500	2,000
$3.00	1,000	2,500
$3.25	500	3,000
$3.50	0	3,500

The initial equilibrium price is $2.75 per bag. After change in quantity demanded, at $2.75 per bag, quantity supplied exceeds the quantity demanded.

When quantity supplied exceeds the quantity demanded there is surplus and this puts downward pressure on the price.

So,

At the initial equilibrium price, there is a Surplus of pretzels. The price of a bag falls as the market moves to its new equilibrium.

Hence, the correct answer is the option (D)

The new equilibrium price is $2.625 per bag and the new equilibriium quantity is 1,750 bags per day.