Question

Assume that milk is an inferior good.

Assuming all other factors remain constant, if the income of milk buyers increases, what will happen to the equilibrium price and quantity of milk?

Choose 1 answer:

answer choices
Price will increase, but we cannot determine what happens to quantity.

Price will decrease and quantity will decrease.

Price will increase and quantity will decrease.

Price will decrease and quantity will increase.

We cannot determine what happens to price, but quantity will increase

Answer 1

If milk is an inferior good, an increase in income leads to lower demand, resulting in a decrease in both the equilibrium price and quantity of milk.

Step-by-step explanation:

Assuming that milk is an inferior good, when the income of milk buyers increases and all other factors remain constant, the demand for milk is likely to decrease. This is because consumers will purchase less of the inferior good in favor of higher-quality or more expensive alternatives as their income increases. Consequently, the decrease in demand will lead to a lower equilibrium price and equilibrium quantity of milk in the market.

Answer 2

If milk is an inferior good and incomes rise, the equilibrium price and quantity of milk would both decrease due to a decrease in demand.

Step-by-step explanation:

Assuming milk is an inferior good, an increase in the income of milk buyers, with all other factors remaining constant, would generally lead to a decrease in the demand for milk. This happens because as buyers' incomes rise, they tend to purchase less of the inferior goods, favoring higher quality or more expensive substitutes. Consequently, the equilibrium price of milk would decrease due to the reduced demand. Similarly, the equilibrium quantity of milk would also decrease as sellers reduce their supply in response to the drop in price and demand.

Therefore, the correct answer is: Price will decrease and quantity will decrease.