Given linear demand curves, if both demand and supply increase by identical amounts, what happens to the equilibrium price?

• A. The equilibrium price decreases.
• B. The equilibrium price becomes indeterminate.
• C. The equilibrium price increases.
• D. The equilibrium price remains unchanged.

Answer: (D)

Verified step by step guidance

1. Recall that the equilibrium price is determined by the intersection of the demand and supply curves, where quantity demanded equals quantity supplied.
2. Represent the demand curve as \(Q_d = a - bP\) and the supply curve as \(Q_s = c + dP\), where \(a\), \(b\), \(c\), and \(d\) are positive constants, and \(P\) is the price.
3. An increase in demand by an identical amount shifts the demand curve to \(Q_d' = (a + k) - bP\), where \(k\) is the increase in demand.
4. An increase in supply by the same amount shifts the supply curve to \(Q_s' = (c + k) + dP\), where \(k\) is the increase in supply.
5. Set the new demand equal to the new supply to find the new equilibrium price: \((a + k) - bP = (c + k) + dP\). Simplify this equation to see how \(k\) cancels out, showing that the equilibrium price remains unchanged.