Imagine an illness with two cures-drug X and drug Y. Drug X and drug Y are both made by the same firm. Two events recently happened. First, a study was released showing that drug X is less effective than drug Y. Second, the ingredients used to produce drug X increased in price. What are the consequences of these events?

These are the options for the question:

A. The demand for drug X shifts to the right, and the supply of drug X shifts to the left. The result is a rise in the equilibrium price for drug X and a fall in the equilibrium quantity of drug X.

B. The demand for drug X shifts to the right, and the supply curve for drug X shifts to the left. The result is an unknown change in the equilibrium price for drug X and a fall in the equilibrium quantity of drug X.

C. The demand for drug X shifts to the left, and the supply curve for drug X shifts to the left. The result is an unknown change in the equilibrium price for drug X and a fall in the equilibrium quantity of drug X.

D. The demand for drug X shifts to the left, and the supply curve for drug X shifts to the left. The result is a rise in the equilibrium price for drug X and a fall in the equilibrium quantity of drug X.

And this is the correct answer:

D. The demand for drug X shifts to the left, and the supply curve for drug X shifts to the left. The result is a rise in the equilibrium price for drug X and a fall in the equilibrium quantity of drug X.

Explanation:

The demand for drug X shifts to the left because an factor other than price (the fact that drug X has been found to less effective in combatting the illness) has reduced the willingless of users to buy it.

The supply curve also shifts to the left because the company now has less incentive to produce the drug (demand for it has fallen), also lowering th equilibrium quantity. However, the equilibrium price rises because the company has to make up for the higher costs of the ingredients.