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Effects of an Autonomous Change on Equilibrium Demand in the Product Market

Assume X is a...

Question

Assume X is a normal good. Holding everything else constant, assume that income rises and the price of a factor of production also increases. What point in Figure is most likely to be the new equilibrium price and quantity?

A

Point 9

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B

Point 5

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C

Point 3

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D

Point 2

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Solution

The correct option is D Point 2
Point 2.
As there is increase in income the demand it implies that the demand will increase from D1 to D2 i.e., towards right and because the price of factors of production have increases there will be decrease in supply and it will move towards the left from S1 to S3. The point of equilibrium for cure D2 and S3 is Point 2 being the new equilibrium point.

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