HW3: Homework - Ch. 3: Demand
Question 1
The demand curve
A. depicts the relationship between production costs and output.
B. determines equilibrium price in a market.
C. is a graphical representation of the relationship between price and quantity demanded.
D. is a graphical representation of the relationship between price and quantity supplied.
Hint
The demand curve depicts a relationship between two specific economic variables.Answer
C. is a graphical representation of the relationship between price and quantity demanded.The demand curve is a graphical representation of the relationship between price and quantity demanded. It is typically negatively sloped due to the law of demand.
The relationship between price and quantity supplied is depicted by the supply curve. Cost curves depict the relationship between production costs and output. In a market, the interaction of both demand and supply determine equilibrium price.
Question 2
Sort the following scenarios according to whether they would cause a shift in the demand curve or movement along a demand curve.
Hint
Several variables are assumed fixed for any demand curve. The demand curve shifts if and only if there is a change to one of these variables.Answer
A demand curve shows the relationship between the price of a good and quantity demanded. A change in the price of a product therefore results in a movement along the demand curve. In this case, when the price of laundry detergent increases or the price of dorm furniture decreases, it implies a movement along the respective demand curve.
The demand curve shifts when a change occurs that causes consumers to purchase either more or less of a good at all price levels.
Lamian's first place finish in a competition shifts the tastes and preferences of consumers. This should be modeled as a shift in the demand curve.
Out-N-In saw an increase in sales that corresponded to the price of a substitute good (chicken) increasing. For substitutes, an increase in the price of one good (chicken), leads to an increase in demand for the other (beef).
Question 3
Answer the two questions relating to demand and the law of demand.
A. Which can cause a shift in the demand curve?
A change in
A. the cost of production
B. one of the determinants of demand
C. the price of a good
D. the technology used by firms
Which of the choices illustrates the law of demand?
A. Pat offers more candy bars for sale at \$2 than at \$1.
B. Pat wants to buy more candy bars at \$2 than at \$1.
C. Pat wants to buy more candy bars at \$1 than at \$2.
D. None of the choices.
Hint
Recall that the demand curve represents the amounts of a good that people wish to purchase at different possible prices, holding constant all other factors. Make sure you know what the law of demand says in order to answer the second part correctly.Answer
B. one of the determinants of demand and C. Pat wants to buy more candy bars at \$1 than at \$2. You know that the demand curve represents the amount of a good that people wish to purchase at different possible prices, holding constant all other factors. If one of these other factors were to change, then the demand curve would shift. These factors are also referred to as the determinants of demand.The law of demand says that as the price of a good increases, the amount buyers want to purchase decreases. The opposite direction is true, too. As the price of a good decreases, the amount buyers want to purchase increases. The only option that illustrates this is when Pat wants to purchase more candy bars when the price is \$1 than when the price is \$2.
Question 4
The accompanying table contains the individual demand schedules of dark chocolate for Vanessa and Angela. Assuming they are the only people in the market for dark chocolate, place each of their individual demand curves and the market demand curve at the correct locations on the accompanying graph.
| Price of dark chocolate (per pound) | Pounds of dark chocolate demanded by Vanessa | Pounds of dark chocolate demanded by Angela |
|---|---|---|
| $8 | 1 | 3 |
| $1 | 3 | 5 |
Hint
The market demand is the sum of the quantity demanded for each person in the market at each price.Answer
An individual demand curve represents how much of a particular good or service an individual consumer demands at different prices.
To graph Vanessa's individual demand curve, place one endpoint at a price of \$8 and a quantity of one. Then, place the other end point at a price of \$1 and a quantity of three. To graph Angela's individual demand curve, place one endpoint at a price of \$8 and a quantity of three. Then, place the other end point at a price of \$1 and a quantity of five.
A market demand curve represents how much of a particular good or service all consumers within a market demand at different prices.
To find market demand, sum all of the consumers' quantity demanded at each price. At a price of \$8, Vanessa demands one pound of dark chocolate, and Angela demands three pounds of dark chocolate. Therefore, the market demand at a price of \$8 is $1 \text{ pound} + 3 \text{ pounds} = 4 \text{ pounds}$. At a price of \$1, Vanessa demands three pound of dark chocolate, and Angela demands five pounds of dark chocolate. Therefore, the market demand at a price of \$1 is $3 \text{ pounds} + 5 \text{ pounds} = 8 \text{ pounds}$.
| Price of dark chocolate (per pound) |
Pounds of dark chocolate demanded by Vanessa | Pounds of dark chocolate demanded by Angela | Market Demand |
|---|---|---|---|
| \$8 | 1 | 3 | 4 |
| \$1 | 3 | 5 | 8 |
Question 5
As part of a healthy lifestyle, Alex likes to do yoga. Unfortunately, he works for a firm that has fallen on hard times. As a result, Alex sees his salary cut by 12%.
Assuming that yoga is a normal good, shift Alex’s demand curve for yoga to illustrate the effects of the salary cut.
Hint
Define normal good. Determine what happens to the demand for a normal good when income changes.Answer
Demand for a normal good moves in the same direction as the change in income. Alex's income decreases as a result of the salary cut. Therefore, Alex's demand for yoga will decrease, illustrated by a leftward shift of the demand curve.
If yoga were an inferior good, demand would increase as Alex's income fell.
Question 6
For each example listed, decide if the good is a normal good or an inferior good. Make sure you answer from the perspective of the individual or individuals doing the buying or consuming.
Hint
Whether a product is a normal good or an inferior good is determined by how demand responds to a change in the income of consumers.A. Billy’s mom increases his weekly allowance by \$5. As a result, Billy increases the number of apps he downloads on his smartphone. Smartphone apps are ________ good.
A. A normal
B. An inferior
Answer
A. A normalB. Susan gets a 15 percent performance bonus at work. She can finally stop eating so many frozen pizzas and eat something more tasty. Frozen pizzas are ________ good.
A. A normal
B. An inferior
Answer
B. An inferiorC. Mike is an appliance salesman. Refrigerator sales in his store have fallen and so has his commission. Mike decides to switch from name brand cereal to generic cereal. Generic cereal is ________ good.
A. A normal
B. An inferior
Answer
B. An inferiorD. Hair stylist Molly loses a few of her clients. Molly cuts back on the number of smoothies she buys during the week. Smoothies are ________ good.
A. A normal
B. An inferior
Answer
A. A normalExplanation
A normal good is a product that buyers demand more of at every price when their incomes increase and less of when their incomes decrease. Billy buys more smartphone apps when his allowance increases, so smartphone apps are a normal good. Molly buys fewer smoothies after her income falls (due to losing clients), so smoothies are a normal good.An inferior good is a product that buyers demand less of at every price when their incomes increase and more of when their incomes decrease. Susan buys fewer frozen pizzas when her income increases (due to a bonus at work), so frozen pizzas are an inferior good. Mike increases the amount of generic cereal he buys after his income decreases (due to lower commissions), so generic cereal is an inferior good.
Question 7
Milk and cereal are an example of complementary goods.
Which definition best describes this relationship?
A. goods related in such a way that an decrease in price of one leads to a decrease in the demand for the other.
B. goods related in such a way that an increase in quantity demanded of one leads to a increase in the price of the other.
C. goods related in such a way that an increase in price of one leads to a decrease in the demand for the other.
D. goods related in such a way that an increase in price of one leads to an increase in the demand for the other.
Hint
Complementary goods are goods that are always used together, such as milk and cereal, or snowboards and snowboard bindings.Answer
C. goods related in such a way that an increase in price of one leads to a decrease in the demand for the other. Complement goods are goods that consumers use together in consumption. Due to this relationship, price changes in one good will change consumer's decisions to buy the other good. Recall an increase in price decreases the quantity demanded of a good. It follows that the consumers would demand less of the product that "goes with it". If goods are complements, a change in the price of one of the goods will lead to a shift of the demand curve of the other good in the opposite direction of the price change.Question 8
You are the manager of Frito-Lay’s Cheese Puffs account, and you notice that when the price of Cheetos increases, there is an increase in demand for Cheese Puffs. What is the economic relationship between these goods that explains this behavior?
A. The increase in the price of Cheetos causes a decrease in the demand for Cheese Puffs; therefore. these goods are complements.
B. The increase in the price of Cheetos causes a decrease in the demand for Cheetos; therefore, these goods are substitutes.
C. The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are substitutes.
D. The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are complements.
Hint
Recall that some goods are related to one another in the minds of consumers. The specific relationship has implications for how changes in the price of one good affect the demand for the other.Answer
C. The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are substitutes. Substitute goods are goods that can be used in place of one another. Consequently, a change in the price of one good results in the same directional change in the demand for the other. In this case, an increase in the price of Cheetos causes consumers to substitute away from Cheetos and into a similar good, Cheese Puffs. As a result, the demand for Cheese Puffs increases. Graphically, these changes would be represented as a movement along the demand curve for Cheetos but a shift in the demand curve for Cheese Puffs.Question 9
The accompanying table shows the maximum price each person in a small office is willing to pay for a memory foam seat cushion. Since each worker only has one chair, no one wants to buy more than one cushion. Use the table to construct an approximate demand curve for memory foam seat cushions.
| Worker | Max. Price |
|---|---|
| Derrick | \$19 |
| Portia | \$8 |
| Marcus | \$15 |
| Ryo | \$6 |
| Emily | \$10 |
| Kal | \$12 |
Hint
If a price is low enough for Marcus to buy a cushion, then Derrick will also be willing to buy a cushion.Answer
The demand curve relates the price of a good to the quantity of that good which consumers demand at that price. Accordingly, when the price is \$15, there are two people in the office who are willing to buy a seat cushion: Derrick and Marcus. Each of them demand one seat cushion at this price, so the point (2, \$15) should be part of the demand curve. Similarly, when the price drops to \$12, Kal is also willing to buy a seat cushion in addition to Derrick and Marcus. Accordingly, the point (3, \$12) should also be part of the demand curve.
Note that since additional purchases can only be induced by reducing the price, the demand curve will be downward-sloping.
Question 10
Hint
People normally pay less for a good than they are willing to pay. What is the name for this additional utility consumers receive without paying for it?A. Consumer surplus is equal to the difference between
A. the maximum price a buyer is willing to pay and the market price.
B. the minimum price a seller is willing to accept and the market price.
C. the minimum price a buyer is willing to pay and the market price.
D. the maximum price a seller is willing to accept and the market price.
Answer
A. the maximum price a buyer is willing to pay and the market price.B. Consumer surplus is shown graphically as the area
A. above the supply curve and below the market price.
B. under the demand curve and below the market price.
C. under the demand curve and above the market price.
D. above the supply curve and above the market price.
Answer
C. under the demand curve and above the market price.Explanation
Buyers can generally buy goods at prices below the maximum prices they are willing to pay. The difference between the maximum price an individual will pay and the price the individual actually pays is consumer surplus.To find consumer surplus on a graph, compare the height of the demand curve with the market price. The height of the demand curve shows the highest price buyers will pay. Of course, the price people actually pay is the market price. Therefore, the area under the demand curve but above the price shows the consumer surplus for all units consumed.
Question 11
Below is the market for maple syrup. Shade total consumer surplus (CS) on the graph by correctly placing the CS shaded area.
Hint
Consumer surplus is the net benefit consumers receive from market transactions—the utility of a product over and above what the consumer pays for it.Answer
Individual consumer surplus is the difference between a consumer's willingness to pay and the price the consumer actually pays for a good. Total consumer surplus is the sum of each of the individual consumer surpluses for each unit of the good (in this example, maple syrup) purchased.
The market or equilibrium price is determined by the point of intersection between the supply and demand curves. The demand curve denotes the willingness to pay of all individual consumers. Hence, the total consumer surplus is the area below the demand curve and above the market price (forming a triangular shape). More specifically, the first point of this triangle is the equilibrium point, the second point of the triangle is the market price on the y-axis, and the third point can be found by following the second point up the y-axis to where it meets the demand curve.
Question 12
Consider the market for iced coffee. Suppose that the price of an iced coffee falls from $4.25 to $3.50. Assuming that the point on the graph below corresponds to the initial price of $4.25, move the point to a new position on the curve to show the impact of this price change (holding everything else constant).
Hint
The law of demand states that as price increases, the quantity consumers demand decreases. Will a change in price, holding all else constant, cause the demand curve to shift or for the price to move along the demand curve.Answer
The law of demand says that holding everything else constant, when the price of a good increases, buyers will purchase less of that good. Similarly, holding everything else constant, when the price of a good decreases, buyers will buy more of that good.
The price of an iced coffee has fallen. According to the law of demand, this is represented graphically as a movement along a demand curve, not a shift of the demand curve. Therefore, the price point will move from a price of \$4.25 to a price of \$3.50 on the original demand curve.