If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens in the market for bus rides (assuming that bus rides are an inferior good)?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity rises
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

Answer: (A)

Verified step by step guidance

1. Identify the effects of each change separately: An increase in wages for bus drivers increases the cost of providing bus rides, which typically leads to a decrease in supply (a leftward shift of the supply curve).
2. Consider the effect of a decrease in consumer income: Since bus rides are considered an inferior good, a decrease in income leads to an increase in demand for bus rides (a rightward shift of the demand curve).
3. Analyze the combined effect on equilibrium price: The leftward shift in supply tends to increase the equilibrium price, while the rightward shift in demand also tends to increase the equilibrium price. Therefore, the equilibrium price is likely to rise.
4. Analyze the combined effect on equilibrium quantity: The leftward shift in supply tends to decrease the equilibrium quantity, while the rightward shift in demand tends to increase the equilibrium quantity. These opposing effects make the change in equilibrium quantity ambiguous.
5. Conclude the analysis: Based on the shifts in supply and demand, the equilibrium price rises, but the change in equilibrium quantity is ambiguous due to the opposing effects of supply and demand shifts.