What is the likely effect on market equilibrium when sellers exit a market in which the average seller is experiencing losses?

• A. The market supply increases, leading to a lower equilibrium price.
• B. The market supply decreases, leading to a higher equilibrium price.
• C. The market demand increases, leading to a lower equilibrium price.
• D. The market demand decreases, leading to a higher equilibrium price.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the scenario where sellers are experiencing losses. When sellers in a market are making losses, some will exit the market because continuing to sell is not profitable.
2. Step 2: Recognize that when sellers exit the market, the total number of sellers decreases, which causes the overall market supply to decrease. This is because fewer sellers are offering goods or services.
3. Step 3: Recall the law of supply and demand: a decrease in supply, with demand held constant, leads to a shortage at the original price, putting upward pressure on the price.
4. Step 4: As the price rises, the market moves toward a new equilibrium where the quantity demanded equals the quantity supplied at a higher price level.
5. Step 5: Conclude that the exit of sellers reduces market supply, which causes the equilibrium price to increase, matching the correct answer choice.