Question

42) Which of the following raises the equilibrium price and increases the equilibrium quantity of used cars?

A) an increase in the wage rate paid to used car salespeople
B) a fall in income if used cars are an inferior good
C) neither of the above because the question suggests a violation of the "law of demand"
D) neither of the above because the question suggests a violation of the "law of supply"

Answer 1

Answer: B.

Explanation: When the income of consumers falls, the demand for inferior goods decreases. This means that the quantity of used cars demanded at a given price will decrease, which will cause the equilibrium price of used cars to fall. As the price falls, the quantity of used cars supplied will also decrease, but the decrease in the quantity supplied will be smaller than the decrease in the quantity demanded. This will result in an increase in the equilibrium quantity of used cars.

An increase in the wage rate paid to used car salespeople will not affect the equilibrium price or quantity of used cars, because it is not directly related to the demand or supply of used cars. Therefore, option A is not correct.

The law of demand states that, other things being equal, the quantity of a good demanded decreases as its price increases. The law of supply states that, other things being equal, the quantity of a good supplied increases as its price increases. Therefore, options C and D are not correct, because the question does not suggest a violation of either of these laws.