Note from the table that when the professor announced that the textbook would be

Question

Note from the table that when the professor announced that the textbook would be required, the buyer value for each of the buyers increased by $8. According to the model of supply and demand, which statement best describes what happened to the equilibrium price and the reason why? A.  The price goes up by $4 because this reduces the quantity of books that buyers want to buy from 10 at $14 to 8 at $18 and increases the quantity of books that sellers want to sell from 6 at $14 to 8 at $18. B.  The price does not increase. The seller costs are the same. As a result, competition between the sellers keeps the price at the same level as before. C.  The price goes up by $4 because it is fair for the buyers and sellers to share equally the effects of this new information. D.  The price increases by $8 because the books are worth $8 more to each of the buyers, and competition between the buyers drives the price up by the full amount. E.  The price does not increase. Buyers will refuse to pay more because costs have not changed. F.  The price increases by $8 because this is the change in price necessary to reduce the number of books that buyers want to buy to 8, the number that sellers want to sell.

Explanation / Answer

The answer to the above question is OPTION D.  The price increases by $8 because the books are worth $8 more to each of the buyers, and competition between the buyers drives the price up by the full amount.

In order to achieve equilibrium in the market, the demand and supply forces have to meet at a common point i.e. the equilibrium point. Now, since the buyer value has increased by $ 8 due to announcement of the requirement of the textbook, assuming complete knowledge of the market condition, to be at par with the increase in the demand the price increases by $ 8.

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