Question
In: Economics
5. What would happen to the equilibrium price and quantity exchanged in the following cases? a....
5. What would happen to the equilibrium price and quantity
exchanged in the following cases?
a. An increase in income and a decreasing price of a
complement, for a normal good.
b. A technological advance and lower input prices.
c. An increase in the price of a substitute and an increase in
income, for an inferior good.
Solutions
Expert Solution
a) An increase in the income and decrease in the price of the complement will increase the quantity exchanged and price of the product. People will more income will demand more goods and due to a decrease in the price of complement, the demand will be even higher. This will increase the quantity demanded and the price of the goods.
b) This will increase the quantity demanded and the price will be lower. This changes will shift the supply curve to the right at a lower price and higher quantity.
c) An increase in the price of a substitute will increase the demand for the good but an increase in the income will decrease the demand for the same good. We have to evaluate the tradeoff between the increased income and increase in the price of the substitute. If income has increased more than the price of substitute the price of the good will fall and quantity demanded will decrease and vice versa.
Rahul Sunny answered 1 year agoRelated Solutions
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