Suppose that the demand for oranges increases. Carefully explain ...

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Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium.
 
  What will be an ideal response?

Question 2

If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will
 
  A) set a higher price in the market that is more price elastic.
  B) set a lower price in the market that is more price elastic.
  C) set price so as to equate the elasticity of demand across markets.
  D) set price equal to marginal cost in both markets.

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Answer to Question 1

The increase in demand causes a shortage at the original equilibrium price; the quantity supplied is less than the new quantity demanded at that price. The existence of the shortage will cause the price to rise. As price rises, the quantity supplied will increase and the quantity demanded will decrease (along the new demand curve) until equilibrium is reached at a higher price (and quantity).

Answer to Question 2

B

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Excellent

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