Figure 3-8

-Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D₁ and S₂ (point B) Assume that Motorcycles are a normal good. If there is an increase in number of companies producing motorcycles and a decrease in income (assume motorcycles are a normal good), the equilibrium could move to which point?
A) A
B) B
C) C
D) E

Question

Figure 3-8
 
-Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D₁ and S₂ (point B) Assume that Motorcycles are a normal good. If there is an increase in number of companies producing motorcycles and a decrease in income (assume motorcycles are a normal good), the equilibrium could move to which point?
A) A 
B) B 
C) C 
D) E

Quizplus · Accepted Answer

An increase in the number of companies producing motorcycles would shift the supply curve to the right (from S2 to S3). A decrease in income would shift the demand curve to the left (from D1 to D2). The new equilibrium point would be where the new supply curve (S3) intersects the new demand curve (D2) which is at point C. At point A, there is a surplus of motorcycles which would lead to a decrease in price and an increase in quantity demanded to reach equilibrium. At point B and E, there is still a competitive equilibrium but the quantity demanded and supplied are lower than at point C.

Figure 3-8 -Refer to Figure 3-8.The Graph in This Figure Illustrates an This