Question 2)

Consider a competitive market for a hypothetical product. Suppose that

there is an extended period during which both demand for the product has grown (demand-side

reservation prices have increased) and technological developments have lowered the costs of

production (and therefore supply side reservation prices have decreased). Over this period, which

of the following four equilibrium possibilities are feasible? Circle the correct answer for

each.

(a) Equilibrium price and quantity both increase: feasible / infeasible

(b) Equilibrium price and quantity both decrease: feasible / infeasible

(c) Equilibrium price increases and equilibrium quantity decreases: feasible / infeasible

(d) Equilibrium price decreases and equilibrium quantity increases: feasible / infeasible

For each possibility that you say is feasible, draw a supply and demand graph that

illustrates the possibility.