Correct Option: C. The equilibrium price will increase.
Detailed Explanation:
- Understanding Normal Goods:
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A normal good is a type of good for which demand increases as consumer income rises. This is because consumers have more purchasing power and are willing to buy more of these goods when they can afford to do so.
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Demand and Supply Basics:
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The equilibrium price is determined at the point where the quantity demanded by consumers equals the quantity supplied by producers. This is represented graphically by the intersection of the demand curve and the supply curve.
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Impact of Increased Consumer Income:
- When consumer income increases, the demand for normal goods shifts to the right. This means that at every price level, consumers are now willing to buy more of the product than before.
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For example, if the price of a normal good is $10, and previously consumers were willing to buy 100 units, with an increase in income, they might now be willing to buy 150 units at the same price.
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Shifting the Demand Curve:
- The demand curve shifts to the right (D1 to D2). This shift indicates an increase in demand at all price levels.
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As demand increases, suppliers will notice that they are selling more of the product. To maximize profits, they may increase the price, leading to a new equilibrium price that is higher than the previous one.
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New Equilibrium:
- The new equilibrium is established at the intersection of the new demand curve (D2) and the original supply curve (S). This new intersection point will be at a higher price level than before, confirming that the equilibrium price has increased.
Why Other Options Are Incorrect:
- Option A: The equilibrium price will decrease.
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This option is incorrect because a decrease in equilibrium price would imply a decrease in demand or an increase in supply, neither of which is the case when consumer income increases for a normal good.
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Option B: The equilibrium price will remain unchanged.
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This option is also incorrect. If demand increases due to higher consumer income, the equilibrium price cannot remain unchanged. The market dynamics will force a new equilibrium price to be established.
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Option D: The equilibrium price will fluctuate unpredictably.
- While prices can fluctuate due to various factors, the scenario presented (a significant increase in consumer income for a normal good) leads to a predictable outcome: an increase in equilibrium price. Thus, this option does not accurately reflect the economic principles at play.
Summary of Key Points:
- Normal Goods: Demand increases with rising consumer income.
- Demand Curve Shift: An increase in income shifts the demand curve to the right.
- Equilibrium Price: The new intersection of the demand and supply curves results in a higher equilibrium price.
- Market Dynamics: Increased demand leads to higher prices as suppliers respond to greater consumer willingness to pay.
This understanding of how consumer income affects the equilibrium price of normal goods is crucial for analyzing market behavior in economics.