Question

Suppose an economic boom causes incomes to increase and, at the same time, drives up wages for the sales representatives who work for cell phone companies. Assume that smartphones are a normal good. This will cause the: price of cell phones and the equilibrium quantity to rise O price of cell phones to rise, but the change in the equilibrium quantity is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply. price of cell phones and the equilibrium quantity to fall. quantity of cell phones to rise, but the change in the equilibrium price is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply.

Answer 1

Answer

The correct answer is (b) price of cell phones to rise, but the change in the equilibrium quantity is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply.

If A good is a normal good then increase in income results in increase in demand. Here because of economic boom income increases and as smart phones are a normal good, this increase in income will result in increase in demand and hence demand of smart phones will shift to the right.

It is also given that Wages of workers working in smart phone companies increases and as these workers are a factor of production for a smart phone, this increase in cost of factor of production(i.e. wages) will result in decrease in supply because Total cost and Marginal cost will increase and because of this they supply less than before at all price levels and hence supply will decrease and shift to the left.

Hence Demand of smart phones increases and shift to the right and Supply of smart phones increases and shift to the left. This will result in increase in equilibrium price and hence equilibrium price will increase.

If rightward shift in demand curve is greater than leftward shift in supply curve, then equilibrium quantity will increase, If rightward shift in demand curve is lesser than leftward shift in supply curve, then equilibrium quantity will decrease and If rightward shift in demand curve is equal to leftward shift in supply curve, then equilibrium quantity will remains same.

Hence, the correct answer is (b) price of cell phones to rise, but the change in the equilibrium quantity is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply.