If the price and quantity for a normal good, Good A, is $7 and 5 units at the original equilibrium, what is one possibility for the new equilibrium of Good A if we see income increase and all other factors stay constant?

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BlackTom AI · Accepted Answer

We start by restating the scenario to ensure clarity: A normal good (Good A) has an initial price of $7 and an initial quantity of 5 units at the original equilibrium. An increase in income occurs while all other factors remain constant. For a normal good, higher income increases demand because consumers can buy more at every price, which typically raises both the equilibrium price and the equilibrium quantity when the supply curve is unchanged.

Option a: $8 and 4 units. Here the price rises to $8, but the quantity falls to 4 units. With an increase in income for a normal good, we expect the quantity to rise, not fall, since demand should shift right. So this combination is inconsistent with the effect of higher income on a normal good.

Option b: $8 and 6 units. In this choice, price rises to $8 and quantity rises to 6 units. This aligns with the basic intuition that an income increase shifts the demand curve to the right, leading to a higher equilibrium price and a higher equilibrium quantity when supply is held constant. The direction of both changes matches the expectation for a normal good under higher income.

Option c: $6 and 4 units. Here both price and quantity decrease. A decrease in price accompanying a higher income would imply a different dynamic, such as a decrease in demand or an increase in supply, which contradicts the scenario of a normal good experiencing higher income. Therefore this option is inconsistent with the given condition.

Option d: $6 and 6 units. This option shows a lower price but a higher quantity. While quantity increasing fits the normal-good income increase idea, the price decrease is not the typical outcome when demand shifts right unless there is an unusual supply response. Since the scenario states only income increases and other factors stay constant (i.e., the supply curve unchanged), the common outcome is a higher price accompanying a higher quantity, making this option less plausible.

In summary, among the provided choices, option b presents a consistent outcome with a normal good experiencing an income increase while keeping the supply unchanged: higher price and higher quantity at equilibrium.

MCD2020 - T1 - 2025 Lecture Quiz 2 - Market Forces of Supply and Demand

If the price and quantity for a normal good, Good A, is $7 and 5 units at the original equilibrium, what is one possibility for the new equilibrium of Good A if we see income increase and all other factors stay constant?

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MCD2020 - T1 - 2025 Lecture Quiz 2 - Market Forces of Supply and Demand

If the price and quantity for a normal good, Good A, is $7 and 5 units at the original equilibrium, what is one possibility for the new equilibrium of Good A if we see income increase and all other factors stay constant?

View Explanation

Log in for full answers

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