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Consider the following scenario:

X is an inferior good. What would happen to the price of X if the cost of production of X increased at the same time as the consumers incomes (increased).
Options:
O the price would definitely decrease
O the price would definitely increase
O the effect on the price is be unknown because we don't know which shift dominates.

User Rakslice
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1 Answer

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Final answer:

The effect on the price of an inferior good when production costs and consumer incomes increase is ambiguous without knowing the dominance of either the decreased supply due to higher production costs, or the decreased demand because it is an inferior good as incomes rise.

Step-by-step explanation:

When discussing the effect of increased production costs and rising incomes on the price of an inferior good, it is important to understand how these two factors interact. An inferior good is a product for which demand decreases as consumer income increases. In the scenario where both the cost of production for Good X increases and consumer incomes increase, two things happen:

  1. The supply of Good X would decrease due to higher costs of production, which would typically lead to a price increase as firms pass on the higher costs to consumers.
  2. At the same time, as Good X is an inferior good, the demand for it would decrease because consumers with higher incomes would likely switch to better substitutes.

These opposite forces on price create an ambiguity. The net effect on the price of Good X cannot be determined without knowing which effect is stronger. It is possible that the supply decrease is more significant and prices rise, or the drop in demand could be larger and prices might fall. Therefore, the correct answer to the question is that the effect on price is unknown because we don't know which shift dominates.

User Logiraptor
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