Question 1
Suppose the market for acoustic guitars is perfectly competitive and in equilibrium. What would happen to the equilibrium price and quantity if the price of electric guitars were to fall substantially?
- Price decreases, Quantity decreases
- Price decreases, Quantity increases
- Price increases, Quantity increases
- Price increases, Quantity decreases
- Cannot determine
Explanation: Electric guitars are a likely substitute for acoustic guitars. If the price of electric guitars goes down, more consumers are likely to buy them instead of acoustic and fewer acoustic guitars will be demanded at any price.
This is an inward shift of the demand curve, which results in a lower equilibrium price and quantity when you graph it.