QUESTION 1 From 2010 to 2012, the equilibrium price of natural gas fell while th

Question

QUESTION 1 From 2010 to 2012, the equilibrium price of natural gas fell while the equilibrium quantity increased. Does the fact that the equilibrium quantity increased while the price fell mean that the supply curve of natural gas must be downward-sloping, in violation of the law of supply? No, because the demand for natural gas could have increased over that interval, which would explain the pattern of falling price with rising quantity Yes, the law of supply is violated in this case - probably as a result of a change in technology, which always disrupts the law of supply. Yes, the law of supply is violated in this case. Markets for natural resources are subject to disruptions caused by weather and equipment failure, so they do not obey the laws of supply and demand No, because the supply curve of natural gas could have shifted to the right over that interval, which would explain the pattern of falling price with rising quantity QUESTION 2 Refer to the scenario in the previous problem. What could have caused an increase in equilibrium quantity combined with a decrease in equilibrium price? (Choose all that apply) An improvement in technology An increase in the income of buyers of natural gas A decrease in the cost of production due to lower wages An increase in the number of producers in the industry A decrease in demand for natural gas. An increase in the cost of equipment needed to extract natural gas.

Explanation / Answer

Question 1

In the given case, equilibrium price has fallen while the equilibrium quantity has increased.

This phenomenon can be encountered in the case where demand remains unchanged while supply increases.

This means demand curve will remain constantly placed while supply curve shifts to the right leading to the fall in equilibrium price and increase in equilibrium quantity.

So, it can be stated that there is no voilation of the law of supply in this case and it is the supply curve of the natural gas that could have shifted to the right over that interval leading to falling prices with rising quantity.

Hence, the correct answer is the option (4).

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