Question

Suppose good A is an inferior good. Suppose good B is a normal good. Suppose good A and
good C are substitutes. Suppose good B and good D are complements.

Question 7 Suppose there is an effective price floor at P1 in the market of good A. If the cost of production of good A decreases, which of the following statement is correct?
A. The equilibrium price of good A goes up & The equilibrium quantity of good A goes
up
B. The equilibrium price of good A goes down & The equilibrium quantity of good A
goes down
C. The equilibrium price of good A goes up & The equilibrium quantity of good A goes
down
D. The equilibrium price of good A goes down & The equilibrium quantity of good A
goes up
E. None of the above is correct

Answer 1

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Good A is an inferior good which implies rise in income will cause fall in quantity demanded of A and vice versa.

There is an effective price floor at P1 for good A. A price floor is the lowest legal price a commodity can be sold at.

Now, If the cost of production of good A decreases,

1. Supply curve will shift rightwards. So, price can never go up.
2. Price would surely come down in the absence of price floor.
3. Price will come down in equilibrium since government implement price programmes to provide lower price to consumers. In this case, it is naturally coming down due to reduced cost of production and increased supply. So, it will come down in presence of price floor too.

According to above information,

Ans = D. The equilibrium price of good A goes down & The equilibrium quantity of good A
goes up.