Question

Suppose that desktop computers are normal goods and laptops are their substitutes. Assume that incomes of desktop users fall dramatically while the prices of desktop processors (which are used as inputs in desktop computer production) increase sharply. How would these developments affect the equilibrium quantity and price of desktop computers?

		The equilibrium quantity would fall, but the equilibrium price would be ambiguous.
		The equilibrium price would decrease, but the equilibrium quantity would be ambiguous (i.e. we would not be able to tell how the quantity would be affected).
		Both the equilibrium price and the equilibrium quantity would fall.
		The equilibrium price would fall and the equilibrium quantity would increase.

Answer 1

As desktop computers and laptops are perfect substitutes to each other. Fall in income of desktop computers will reduce demand of it. On the other hand, price of desktop processors rises which raise overall cost of producing desktop and induce producers to reduce its production.

When demand falls more thand supply: Price falls from its initial level while output also falls.

When supply fall more than demand: Price rises from its initial level while output level falls.

When fall in demand = fall in supply: Price remains at its initial level while output level falls.

Thus, there is ambiguous effect on price while output level will surely fall. Option A is correct.