An increase in consumer income causes a decrease in the demand for soft drinks (an inferior good here), accompanied by an increase in the supply of soft drinks as a result of falling sweetener prices, will result in:
A)a decrease in the equilibrium quantity of soft drinks and no change in the equilibrium price.
B)a decrease in the equilibrium price of soft drinks and no change in the equilibrium quantity.
C)a decrease in the equilibrium price of soft drinks; the equilibrium quantity may increase or decrease.
D)an increase in the equilibrium quantity of soft drinks; the equilibrium price may increase or decrease.

Question

Quizplus · Accepted Answer

An increase in consumer income causes a decrease in the demand for soft drinks (an inferior good). Thus, the demand curve for soft drinks shifts leftward. At the same time, the falling sweetener prices increase the supply of soft drinks (the supply curve shifts rightward). Consequently, the equilibrium price would decrease. However, the equilibrium quantity may increase or decrease depending on the magnitude of the shifts in demand and supply curves. Therefore, the correct answer is C, which indicates a decrease in the equilibrium price of soft drinks, and the equilibrium quantity may increase or decrease.

An Increase in Consumer Income Causes a Decrease in the Demand