Question

Good A (an inferior good) and Good B (a normal good) are viewed by consumers to be substitute products. Suppose that the price of Good B falls at the same time that consumer income increases. What is the net effect of these two events on equilibrium in the market for Good A?

a. an increase in equilibrium quantity and an indeterminate effect on price

b. a decrease in both the equilibrium price and quantity

c. an indeterminate effect on quantity but an increase in price

d. an increase in both the equilibrium price and quantity e. We cannot determine based on the given information

Assume a price floor is imposed in the market for milk at the current equilibrium price, and that a price ceiling is imposed in the market for natural gas at the current equilibrium price. What will a decrease in demand for both milk and natural gas create?

a. Shortages in both the milk and natural gas markets.

b. Surpluses in both the milk and natural gas markets.

c. A surplus in the milk market and a shortage in the natural gas market.

d. A shortage in the natural gas market and increase the quantity traded in the milk market.

e. A surplus in the milk market and a decrease in the quantity traded in the gas market

Wool and cotton can both be used to manufacture clothing in the garment industry. Suppose that bad weather destroys cotton crops at the same time that the price of wool increases significantly. What is likely to be the impact on the market for cotton? a. a decrease in both the equilibrium price and the quantity sold b. an increase in the equilibrium price and a decrease in the quantity sold c. an increase in both the equilibrium price and the quantity sold d. an uncertain effect on the equilibrium quantity but an increase in the equilibrium price e. none of the above

please explain the process

Answer 1

Option B is correct because decline in income will decrease the demand for good a since it is an inferior good. At the same time the price of its substitute has decreased which means its demand will again decrease when consumers increase the consumption of substitute. When the demand curve shifts to the left both the price and the quantity will decrease

Option E is correct. Demand has decreased which means the demand curve has shifted to the left in both markets. And because there is a price floor in the milk market now there will be a surplus. There is a price ceiling in natural gas market and when price is reduced price ceiling will not be binding and therefore we have a decrease in quantity

Option B is correct