Suppose the market for fish (a normal good) in the U.S. is in equilibrium. Then suppose that the workers in the fishing industry successfully negotiate for a higher wage, while at the same time average household incomes in the U.S. increase dramatically. What will happen to the equilibrium price and quantity in the market for fish?
a. Price will increase, quantity could increase or decrease
b. Price will decrease, quantity could increase or decrease
c. Price and quantity both increase
d. Price and quantity both decrease
e. Price and quantity will both increase
The scenario which is given is – workers after negotiating start earning more wages and during the same time the income of the household also increases. This scenario will have two affects:
First impact: Due to the increase in the wages of the workers, the supply of the fish in the US Market will increase. This is because, there is a limited budget, and all the expenses of the fishing industry has to be done under that budget. If the wages increases, this effects the budget as more income is used on the wages of the workers, as a result, the fish industry will be able to sell less finish due to budget constraint.
Second Impact: As the income of the households increase, there ought to be an increase in the demand of fish in the US Market. This is plain logic, that we come across in our everyday lives. The more money we have or the more buying capacity we have, the more demand we will have eventually. That is the reason why rich have more demands which including more of luxurious demands than the necessities and the poor have very limited demand which is just the necessity goods needed for survival.
However, the effect on the quantity of the equilibrium will either increase or will decrease will depend on the the effect of change whether the supply of fish is greater or the demand of fish is greater. For instance, if the increase in demand of fish is at a higher magnitude than the decrease in supply, then in such a case the equilibrium of quantity will always increase. On the other hand, if the increase in demand of fish is at a lower magnitude than the decrease in supply, then in such a case the equilibrium of quantity will always decrease.
The last case is when both the changes as mentioned above are in the same amount, then the equilibrium quantity will not change, but there will be an increase in the price.
Answer: As per the scenario, the correct answer is ‘A’ as it states that “Price will increase, quantity could increase or decrease”.