Refer to the diagram. A shortage of 160 units would be encountered if the price was:

• A. above the equilibrium price
• B. below the equilibrium price
• C. at a price where quantity supplied equals quantity demanded
• D. equal to the equilibrium price

Answer: (B)

Verified step by step guidance

1. Understand the concept of shortage in a market: A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price.
2. Recall that the equilibrium price is the price at which quantity demanded equals quantity supplied, so no shortage or surplus exists at this price.
3. Recognize that if the price is set below the equilibrium price, the lower price encourages consumers to demand more, but producers supply less, creating a shortage.
4. Use the information given (a shortage of 160 units) to identify that this shortage happens at a price below the equilibrium price, because only then does quantity demanded exceed quantity supplied by that amount.
5. Conclude that prices above or equal to the equilibrium price do not cause shortages; instead, prices above equilibrium cause surpluses, and at equilibrium, supply equals demand.