No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Basic Economic Concepts (10 of 10)

Question 10:
Assume that the market for good T is currently in equilibrium and good T is an inferior good. If consumer income rises at the same time that the costs of producing good T falls, then what will happen to the market equilibrium?

A.  Price increases; Quantity indeterminate
B.  Price indeterminate; Quantity decrease
C.  Price indeterminate; Quantity increases
D.  Price decreases; Quantity indeterminate

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Correct Answer: D, Price decreases; Quantity indeterminate. When the costs of production fall, supply shifts to the right (P falls, Q rises). Since T is an inferior good, demand shifts left when income increases (P falls, Q falls). After both shifts, the quantity can increase, decrease, or stay the same.