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Unformatted text preview: ntity will rise. However, in question 4 (just demand shifts) the equilibrium price rose, while in question 4 (just supply shifts) the equilibrium price fell. This means that we can’t determine which direction the price will move when we combine the two scenarios. To see this, consider the two graphs below. In the first graph, the demand curve shift is small relative to the supply curve shift, and we can see that the equilibrium price falls. In the second graph, the demand curve shift is large relative to the supply curve shift and the equilibrium price rises. So we can see that the direction of the equilibrium price movement depends on which effect dominates. The answer is A. P S1 S2 D D2 Q 1 P S1 S2 D2 D1 Q 7. The first thing we want to do as the ISO is to arrange the bids from the buyer from the highest to lowest, and the bids from the sellers from the lowest to the highest. We want to do this because we want the most efficient sellers to sell first and the consumers who want the good the most to consume first. We get the following table: Buyers Bid Sellers (Offer to buy in $ ) Bid (Offer to sell in $) Charles 14 Allie 3 Dane 12 David 4 Bill 8 Earl 4 Elizabeth 5 Cindy 5 Aretha 3 Brett 14 We see then that the price that clears the market, or the price that causes the demand and supply to be equal, is $5. This is because at $5, Charles, Dane, Bill, and Elizabeth are willing to purchase one unit of electricity (so the demand is 4), and at $5, Allie, David, Earl, and Cindy are willing to sell one unit of electricity (so the supply is also 4). The answer is C. 8. Here, we just need to look at each answer and see whether or not the people are buying or selling in the market clearing allocation of 4 units, at a price of $5. Going down the list, we see that Aretha does not consume, so A is not correct. Charles does buy, but Brett does not sell. So B is incorrect as well. Looking at C, Bill does buy, and David does sell. So the answer is C. 9. First, realize that a change in consumer income is a demand shifter. Which way it shifts depends on the type of good that we are looking at. We are not given whether a widget is a normal good or inferior good, so we don’t know right away. But we are then given that the price of widgets increase while quantity of widgets remains unchanged. This tells us that the demand shift is a rightward shift, and that widgets are indeed a normal good. How do we know that? Well, if demand shifts to the left instead (i.e....
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