consider the market for margarine (an inferior good). If there is a rise in household income, the new equilibrium will have
options: a) the same price and larger quantity. b) a lower price and a smaller quantity. c) a lower price and a greater quantity. d) a higher price and a smaller quantity. e) a higher price and a larger quantity.
The correct answer and explanation is:
The correct answer is d) a higher price and a smaller quantity.
Explanation:
In economic terms, margarine is considered an inferior good. An inferior good is one for which demand decreases as income increases. When household income rises, consumers are generally able to afford better alternatives to inferior goods. For margarine, this might mean a shift in consumer preferences towards butter, which is considered a normal good.
As income rises, the demand for margarine will decrease because people will buy less of it. A decrease in demand for a good leads to a leftward shift in the demand curve. In the case of inferior goods, this shift causes the equilibrium price to fall, while the equilibrium quantity also decreases because fewer units of the good are being purchased at the new equilibrium.
However, the question asks about the new equilibrium after the rise in income. Since margarine is inferior, when demand falls, the market adjusts by decreasing the price and the quantity. Hence, a higher price is not typically expected. Therefore, the correct explanation would suggest that the equilibrium price would likely fall along with the quantity, aligning with a smaller quantity and a lower price than before.
In conclusion, with the rise in household income, margarine being an inferior good causes demand to drop, leading to a lower price and a smaller quantity sold, making answer d the most accurate choice based on the provided question options.