A higher price for a normal good

The diagram shows supply and demand crossing at P1. For the equilibrium price to rise to P2, one of the curves has to shift: demand to the right or supply to the left.

The good is normal, which means people buy more of it when their incomes rise. Higher incomes shift demand to the right. The new demand curve crosses the same supply curve higher up, so the equilibrium price rises, and P2 is a possible new price.

Now check the others. A subsidy and lower production costs both shift supply right, which lowers price. A pricier complement shifts this good's demand left, which also lowers price. A legal maximum is a ceiling, and a ceiling cannot push the market price up.

Each choice

• A (correct). For a normal good, more income shifts demand right, and the new crossing is at a higher price.
• B. A price ceiling sets a highest legal price. Set at P2, above equilibrium, it would not bind at all, and the price would stay at P1. A maximum is a cap, not a target that pulls price up.
• C. A subsidy lowers the cost of supplying each unit, so supply shifts right and price falls. Reading a subsidy as something that makes the good more expensive gets the direction backward.
• D. If a complement costs more, people buy less of it and less of this good too. Demand for this good shifts left and its price falls. This choice treats a complement as if it were a substitute.
• E. Lower costs shift supply right, so the price falls below P1. A student may link costs and price but reverse the direction of the change.