Question

Suppose pasta salad is a normal good. What will happen if the price of pasta (a major ingredient in pasta salad) increases and income also increases?

Choose one:

A. The equilibrium quantity and equilibrium price of pasta salad will increase.

B. The equilibrium quantity of pasta salad will decrease, and the equilibrium price of pasta salad could either increase or decrease.

C. The equilibrium quantity of pasta salad could either increase or decrease, and the equilibrium price of pasta salad will increase.

D. The equilibrium quantity and equilibrium price of pasta salad will both decrease.

Answer 1

Answer
there are two effects
one is input effect
The pasta is input of pasta salad so increase in price decreases supply of pasta salad and that will increase price and decrease quantity
second is an income effect
the good is normal so increase in income increases demand which increases price and quantity
in both effect price increases but quantity change is in opposite way so option c

C. The equilibrium quantity of pasta salad could either increase or decrease, and the equilibrium price of pasta salad will increase.