Question

Which of the following events would cause both the equilibrium price and equilibrium quantity of number two grade potatoes to increase if number two grade potatoes are an inferior good? a. an increase in consumer income b. a decrease in consumer income c. greater government restrictions on agricultural chemicals d. fewer government restrictions on agricultural chemicals

Answer 1

Answer:

The correct answer is option b.

Explanation:

If number two grade potatoes are an inferior good, a decrease in the consumer income will cause its equilibrium price and quantity to increase.  

Inferior goods have negative income elasticity, this implies that their demand is inversely related to change in income.  

So, a decrease in income will increase the demand for two grade potatoes. This will cause the demand curve to shift to the right. This rightward shift in the demand curve will increase both the equilibrium quantity as well as the equilibrium price.