Final answer:
In the market for watermelons, when a severe drought occurs, the equilibrium price increases and the equilibrium quantity decreases, which corresponds with the equilibrium moving from the original point to a new point with a higher price and lower quantity. Therefore, the correct option is A.
Step-by-step explanation:
The student asked what happens to the equilibrium price and quantity in the market for watermelons when a severe drought occurs. The drought affects the watermelon crop by reducing supply. According to the principles of supply and demand, when there is a decrease in supply (caused by the drought in this case), the supply curve shifts to the left.
This shift results in a higher equilibrium price and a lower equilibrium quantity, which aligns with option (a) from the question. The new equilibrium moves from the original point (Eo) to E₁, reflecting these changes. While a higher price may encourage more farmers to supply the good, increasing supply and pushing the curve to the right, in the short-term effects of a drought, this shift will not immediately alleviate the reduced supply caused by the drought.
Additionally, the higher price might reduce demand slightly, shifting the demand curve to the left from Do to D₁. However, these latter shifts are not part of the immediate consequences of the drought and hence are not relevant to the question posed.