Question

1. Economic prosperity persists and the average real income of all citizens increases by twenty percent (20%). What happens to the equilibrium price and quantity of all inferior goods? Why?

2. The cost of producing new car transmissions increases. What happens to the equilibrium price and quantity of cars? WHY?

3.Several new firms enter the new truck market and begin producing trucks. What happens to the equilibrium price and quantity of trucks? WHY?

4. Two new firms begin producing and selling trucks. At the same time, market preferences shift toward trucks and away from passenger cars. What happens to the equilibrium price and quantity of Trucks? WHY?

Answer 1

1.) inferior goods are defined as those goods whose demand decreases as the income increases and vice versa. given that the income of the citizens increases, the demand for the inferior goods will decrease, which in turn will lower its prices as well. hence both the equilibrium price and quantity will decrease

2.) when the cost of transmission increases that will in turn increase the manufacturing cost of the cars. this will in turn lead to an increase in the price of the car. thus the demand of the cars will decrease, and hence the equilibrium quantity will decrease

3.) when several firms enter the market, the supply will increase. this will lead to a reduction in price for the equilibrium to be maintained. and thus the equilibrium quantity will increase

4.) in this scenario both the supply and the demand will increase. this will lead to an increase in the equilibrium quantity. however the final impact on the price is ambiguous. it can either increase or decrease depending on the relative change in the supply and demand