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CA Foundation · Business Economics · Theory of Demand and Supply

In the market for scooters, consumer incomes rise and, at the same time, the cost of steel used in manufacturing falls. Assuming scooters are normal goods, what is the effect on equilibrium?

Both shifts are rightward, so equilibrium quantity definitely increases. However, the demand increase pushes the price up while the supply increase pushes it down, so the net effect on price cannot be determined without knowing the relative size of the two shifts.

  1. AEquilibrium quantity rises, while the change in price is indeterminateCorrect
  2. BEquilibrium price rises, while the change in quantity is indeterminate
  3. CEquilibrium price falls and quantity falls
  4. DEquilibrium price rises and quantity falls

Explanation

Higher income shifts demand right, which raises both price and quantity. Lower input cost shifts supply right, which lowers price and raises quantity. Quantity unambiguously rises. The price effects oppose each other, so the net change in price depends on the relative size of the shifts.

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