Question

23. Suppose that in the market for good X (a normal good), the following occur simultaneously: (i) consumer incomes increase and (ii) the price of oil (an input to the production of X) increases. Which of the following statements is TRUE?

a) The equilibrium price of X could either increase or decrease, but equilibrium quantity will definitely decrease.

b) The equilibrium quantity of X could either increase or decrease, but equilibrium price will definitely decrease.

c) The equilibrium price of X could either increase or decrease, but equilibrium quantity will definitely increase.

d) The equilibrium quantity of X could either increase or decrease, but equilibrium price will definitely increase.

Answer 1

Since X is a normal good, an increase in consumer income will lead to an increase in demand for normal good X.

An increase in cost of input leads to an increase in the production cost. Hence, it leads toa decrease in Supply.

Correct Option: D)

Due to the above changes, demand curve will shift right and supply curve will shift left. This will lead to a definite increase in equilibrium price. However, whether the equilibrium quantity will increase or decrease will depend on the size of the shift in demand and supply curve.