You read a news article that states that farmers are using technology to increase production, while...

You read a news article that states that farmers are using technology to increase production, while consumer incomes are increasing. The price elasticity of demand for their good is -0.65 and the income elasticity of their good if -1.2. If you read that the equilibrium quantity in the market increased, what must have happened? Be sure to use the most relevant economic vocabulary.

Expert Solution

The income elasticity of demand for the good is -1.2

The value of the income elasticity of demand is negative. When the value of the income elasticity of demand is negative then the good is said to be a inferior good.

So, the said good is a inferior good.

The demand for an inferior good increases as income increases and vice-versa.

In the given case, consumer incomes are increasing.

Being an inferior good, the demand for the said good will decrease due to increase in consumer incomes.

Moreover, it has been stated that farmers are using technology to increase production.

This will result in an increase in supply og said good.

When demand for a good decreases and its supply increases then equilibrium quantity will increase if the magnitude of increase in supply is greater than the magnitude of decrease in demand.

On the other hand, when demand for a good decreases and its supply increases then equilibrium quantity will decrease if the magnitude of increase in supply is less than the magnitude of decrease in demand.

In the given case, the equilibrium quantity in the market has increased.

So,

In the given market, demand has decreased and supply has increased but increase in supply is greater than the decrease in demand and, therefore, the equilibrium quantity in the market has increased.

Rahul Sunny answered 2 years ago

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