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CA Foundation · Business Economics · Theory of Demand and Supply

In the market for smartphones, consumer incomes rise and, at the same time, the cost of key components falls sharply. Assuming smartphones are a normal good, what is the effect on equilibrium price and quantity?

Quantity definitely rises, while the price change cannot be determined. Rising income shifts demand right, pushing price up, and lower component costs shift supply right, pushing price down. Both shifts increase quantity, but the net price effect depends on which shift is larger.

  1. AQuantity rises; the change in price is indeterminateCorrect
  2. BPrice rises; the change in quantity is indeterminate
  3. CPrice falls; the change in quantity is indeterminate
  4. DQuantity falls; the change in price is indeterminate

Explanation

Higher income shifts demand right, raising both price and quantity. Lower costs shift supply right, lowering price and raising quantity. Both shifts raise quantity, but price rises from the demand shift and falls from the supply shift, so the net price change depends on their relative sizes.

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