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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

Other things unchanged, consumer incomes rise and the good in question is a normal good. What is the effect on the equilibrium price and quantity?

Both equilibrium price and quantity rise. Higher income increases demand for a normal good and shifts the demand curve rightward. With supply unchanged, excess demand pushes the price up, and suppliers respond by offering a larger quantity along the supply curve.

  1. ABoth price and quantity riseCorrect
  2. BPrice rises and quantity falls
  3. CPrice falls and quantity rises
  4. DBoth price and quantity fall

Explanation

For a normal good, higher income shifts the demand curve to the right. Along an unchanged supply curve, this creates excess demand at the old price, so price rises. The higher price encourages more supply, so the equilibrium quantity also rises.

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