Question

The diagram given below shows the change in price of cotton shirts. Which one of the following causes the equilibrium price to move from P₁ to P₂?

Options

• Increase in excise duty on raw cotton.

• Expected fall in future price of cotton shirts.

• Fall in the price of synthetic shirts.

• Increase in wage rate.

Answer 1

Fall in the price of synthetic shirts.

Explanation:

A decrease in the price of synthetic shirts, which are alternatives to cotton shirts, would reduce demand for cotton shirts as buyers switched to the less expensive equivalent. This would move the demand curve for cotton shirts to the left, from D to D₁, lowering the equilibrium price from P₁ to P₂.