Question

Suppose good A is an inferior good. Suppose good B is a normal good. Suppose good A and good C are substitutes. Suppose good B and good D are complements.

Suppose there exists an effective price floor in the market for good A. If the GDP increases in this economy, which of the following statement best describes the situation?

		The market quantity of good A remains unchanged.
		The market quantity of good A decreases.
		The market price of good A decreases.
		The market quantity of good A increases.

Answer 1

The market quantity of good A decreases.

It is given that good A is an inferior good. If the GDP is increased in the economy which indicates that disposable income has increased, consumers are likely to purchase less of good a because it is demanded less when income is increased. The demand curve shifts to the left but there is no change in the price because price cannot decline below the effective price floor. However the quantity demanded will decline as the demand curve has shifted to the left. The quantity decreases, therefore.