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X is a normal good. Consumers' income rises while, at the same time, the price of a factor used to produce X also rises. The resulting effect on equilibrium is:
ADemand falls, supply rises, so price falls and quantity is uncertain
BDemand and supply both rise, so quantity rises and price is uncertain
CDemand rises, supply falls, so price rises and quantity is uncertain
DDemand and supply both fall, so quantity falls and price is uncertain
Answer & Solution
Correct answer: C. Demand rises, supply falls, so price rises and quantity is uncertain
1. Higher income raises demand for a normal good, shifting demand rightward.
2. A higher factor price raises costs and reduces supply, shifting supply leftward.
3. Both shifts push price up, so price rises for certain; that rules out option A.
4. The opposing pulls on quantity leave it uncertain, so option C is correct.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit II "Determination of Prices", p.7_
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