Question

Assume that demand for bottled water is relatively price elastic. An increase in supply of bottled water will result in which of the following?
1. A decrease in price, leading to an increase in total revenue
2. A decrease in price, leading to a decrease in total revenue
3. An excess supply of bottled water
4. An excess demand for bottled water
5. A relatively small decrease in price and no change in equilibrium quantity

Answer 1

Answer:

3 then 1

Explanation:

Supply is said to be increased when the quantity supplied expands but the price and quantity demanded remains unchanged. As quantity supplied has increased whereas the quantity demanded is what it was before this change, there is first a surplus of bottled water in the market. This surplus will have a downward pressure on price, reducing the quantity supplied a bit and, as the law of demand suggests ,the quantity demanded will increase. Given that the demand is relatively price elastic, the change in quantity demanded will be greater than the change in price. Therefore the revenue will increase.