Difficulty: Hard

Average Score: 49%

Coffee is a normal good. If the average income of consumers increases, what can you accurately predict about the market for coffee?

Rationale

Both the equilibrium price and quantity of coffee will increase.

As coffee is classified as a normal good, an increase in consumer income typically leads to a rise in demand for coffee. This heightened demand results in both a higher equilibrium price and quantity in the market.

A (Both the equilibrium price and quantity of coffee will decrease) YOUR ANSWER

An increase in consumer income raises the demand for coffee, shifting the demand curve to the right. This shift leads to a higher equilibrium price as sellers respond to increased demand, and a greater equilibrium quantity as more coffee is bought and sold in the market.

B (Both the equilibrium price and quantity of coffee will increase) CORRECT

This choice incorrectly suggests that an increase in income would lead to a decrease in demand for coffee, which contradicts the definition of a normal good. In reality, higher income would typically increase demand, not decrease it, leading to an opposite effect on equilibrium price and quantity.

C (The equilibrium price will decrease, and the equilibrium quantity will increase) YOUR ANSWER

This option presents a misleading scenario where demand decreases, resulting in a lower price. However, with higher income, demand for coffee increases, which would raise the equilibrium price while also increasing the quantity sold.

D (The equilibrium price will increase, and the equilibrium quantity will decrease) YOUR ANSWER

This choice implies that an increase in income would somehow reduce the quantity of coffee sold despite increased demand. Such a scenario contradicts basic economic principles regarding normal goods, where an increase in demand due to higher income should lead to an increase in both price and quantity.

Conclusion

In summary, an increase in consumer income leads to a rise in demand for normal goods like coffee. This increased demand results in higher equilibrium prices and quantities in the market. Understanding this relationship is crucial for predicting market behavior in response to income changes, particularly for goods classified as normal.

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