BR3: Bridge: Demand
Question 1
Your friend tells you the following:
“The law of demand does not work ALL the time. For example, think about the demand for luxury cars (e.g., BMWs, Porshe, etc.). Demand for such cars increases when the price of the car increases.”
Your friend is:
A. wrong; aggregate demand is not the same as regular demand.
B. correct; luxury cars give people a higher status.
C. wrong; demand is not the same as quantity demanded.
D. correct; luxury cars are superior goods.
Hint
The law of demand is understood to apply to all goods except Giffen goods.Answer
C. wrong; demand is not the same as quantity demanded. Your friend appears to have (a) confused demand and quantity demanded and (b) reversed the causal relation between demand and price. Luxury cars, like nearly any product, are subject to the law of demand, so that a rise in price will lead to a fall in quantity demanded. By contrast, if there is an increase in *demand* for a luxury car (a rightward shift of the demand curve), the price of the car will rise. Note, however, that it is the change in demand that plays the causal role, not the change in price.Question 2
Which of the following would cause the demand curve for ice cream to shift to the right?
A. A reduction in the price of ice cream.
B. A reduction in the cost of producing ice cream.
C. A rise in the price of popsicles, a substitute for ice cream.
D. An unexpected cold and rainy summer season.
Hint
The demand curve is a graphical representation of the relationship between price and quantity demanded.Answer
C. A rise in the price of popsicles, a substitute for ice cream. When the price for popsicles, a substitute for ice cream, rises, people who used to consume popsicles will switch to consuming more ice cream. This will shift the demand curve for ice cream to the right.Question 3
Which of the following factors would most likely cause a shift in the demand curve for candles?
A. Falling incomes, due to a weakening economy.
B. A decrease in the number of factories making candles.
C. An increase in the price of wax used to make candles.
D. Improved technology that makes candles less costly to produce.
Hint
Consider which factors are determinants of demand and which are determinants of supply.Answer
A. Falling incomes, due to a weakening economy. Income is among the determinants of demand. In particular, rising incomes increase consumers' purchasing power, leading an increase in demand for all normal goods. By contrast, falling incomes, as when the economy weakens, leads to a decrease in demand for all normal goods.Question 4
College students often buy cheap pizza because it is more affordable. Suppose after graduating, college students find high-paying jobs. The demand for cheap pizza will likely:
A. increase because demand for cheap pizza is negatively related to income.
B. decrease because demand for cheap pizza is positively related to income.
C. increase because demand for cheap pizza is positively related to income.
D. decrease because demand for cheap pizza is negatively related to income.
Hint
Would cheap pizza be a normal or inferior good?Answer
D. decrease because demand for cheap pizza is negatively related to income. There is a negative relationship between income and quantity demanded of an inferior good. Since cheap pizza is an inferior good, students will purchase less of it as their incomes rise.Question 5
Consider the demand for socks. What would cause a movement from one point on the demand curve to a point further down the curve?
A. Increased demand for a kind of shoe typically worn without socks.
B. A big sale on socks.
C. Decreased demand for a kind of shoe typically worn without socks.
D. An increase in the price of socks.