Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The equilibrium price increases and market efficiency is enhanced.
B
The equilibrium price decreases and market efficiency is diminished.
C
The equilibrium price remains unchanged and market efficiency is unaffected.
D
The equilibrium price decreases and market efficiency is enhanced.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, when consumers have more income the demand curve shifts right, meaning people want to buy more at each price. The higher demand pushes the equilibrium price up slightly because sellers can charge a bit more while still selling all their output. The higher price encourages firms to produce more, bringing the market closer to the socially optimal output where marginal cost equals marginal benefit, improving allocative efficiency. For example, if the price of coffee rises from $3 to $3. 20, more farmers grow coffee and supply increases until the new equilibrium is reached.
Detailed Explanation
Demand rises when people have more money. Other options are incorrect because Some think that more demand pushes the price down because sellers think they can sell more at a lower price; People might think that price stays the same because supply can adjust.
Key Concepts
Equilibrium price
Demand curve
Market efficiency
Topic
Market Equilibrium Analysis
Difficulty
hard level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
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Question 3In a perfectly competitive market, how does a decrease in production costs affect the supply curve and the resulting producer surplus, considering market efficiency?
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Question 4How does an increase in consumer income typically affect the demand curve for normal goods, and what is the underlying reason for this shift?
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Question 5How would an increase in production costs typically affect the supply curve in a competitive market?
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Question 6In a competitive market, if there is a significant improvement in technology that allows producers to create goods at a lower cost, how is the supply curve affected, and what is the expected impact on consumer prices?
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