Question

Suppose an economic boom causes incomes to increase and, at the same time, drives up wages for the sales representatives who work for cell phone companies. Assume that smartphones are a normal good. This will cause the: price of cell phones and the equilibrium quantity to rise O price of cell phones to rise, but the change in the equilibrium quantity is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply. price of cell phones and the equilibrium quantity to fall. quantity of cell phones to rise, but the change in the equilibrium price is unclear and depends on whether the shift in demand is larger or smaller than the shift in supply.

Answer 1

Option (B) is correct.

Step-by-step explanation:

Given that smartphones are a normal good and income of the individuals increases because of economic boom. We know that there is a direct relationship between the income of an individual and demand for normal goods.

Increase in the income level of the individuals will result in higher demand for smartphones. This will shift the demand curve of smartphones rightwards.

Simultaneously, the wages of sales representatives who work for cell phone companies also increases. This will increase the cost of production for the firms and shifts the supply curve of smartphones leftwards.

Hence, the equilibrium price of smartphones increases but the effect on equilibrium quantity is indeterminate because its effect will be depend upon the magnitude of the shift of supply and demand curve.