Answer to Question 1:

Suppose that the equilibrium price of eggs is $1.79 per dozen. This means that

1. there is excess supply of eggs at a price above $1.79 and excess demand below that price.

2. there is excess demand for eggs at a price above $1.79 and excess supply below that price.

3. the excess demand equals the excess supply at a price of $1.79.

4. the above are all false because, simply put, supply equals demand at a price of $1.79.

Choose the option that yields the correct answer.

The correct answer is option 1. If the price is at the equilibrium level there is no tendency for it to move away from that level. Moreover, if the price is not at the equilibrium level there are market pressures that will drive it toward equilibrium. If the price is above $1.79 there must be market pressures driving it down---prices will be bid down when there is excess supply. If the price is below $1.79 there must be market pressures driving it up---prices will be bid up when there is excess demand.

Option 2 has it backward and option 3 confuses excess demand and supply with the quantities demanded and supplied---it is the quantities demanded and supplied that must be equal. In equilibrium, excess demand and excess supply must both be zero. Option 4 correctly notes that demand and supply must be equal although, as we shall see later, it is better to use the terms quantity demanded and quantity supplied rather than simply demand and supply because the terms demand and supply often refer to the curves as a whole rather than specific points on them. Anyway, the last option is the wrong choice because it claims wrongly that none of the other options are correct.

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