CHAPTER 4 - CHAPTER 4 INDIVIDUAL AND MARKET DEMAND REVIEW...

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CHAPTER 4 INDIVIDUAL AND MARKET DEMAND REVIEW QUESTIONS 1. How is an individual demand curve different from a market demand curve? Which curve is likely to be more price elastic? ( Hint : Assume that there are no network externalities.) The market demand curve is the horizontal summation of the individual demand curves. The graph of market demand shows the relation between each price and the sum of individual quantities. Because price elasticities of demand may vary by individual, the price elasticity of demand is likely to be greater than some individual price elasticities and less than others. 2. Is the demand for a particular brand of product, such as Head skis, likely to be more price elastic or price inelastic than the demand for the aggregate of all brands, such as downhill skis? Explain. Individual brands compete with other brands. If the two brands are similar, a small change in the price of one good will encourage many consumers to switch to the other brand. Because substitutes are readily available, the quantity response to a change in one brand’s price is more elastic than the quantity response for all brands. Thus, the demand for Head skis is more elastic than the demand for downhill skis. 3. Tickets to a rock concert sell for $10. But at that price, the demand is substantially greater than the available number of tickets. Is the value or marginal benefit of an additional ticket greater than, less than, or equal to $10? How might you determine that value? If, at $10, demand exceeds supply, then consumers are willing to bid up the market price to a level where the quantity demanded is equal to the quantity supplied. Since utility-maximizing consumers must be willing to pay more than $10, then the marginal increase in satisfaction (value) is greater than $10. One way to determine the value of tickets would be to auction off a block of tickets. The highest bid would determine the value of the tickets. 4. Suppose a person allocates a given budget between two goods, food and clothing. If food is an inferior good, can you tell whether clothing is inferior or normal? Explain. If an individual consumes only food and clothing, then any increase in income must be spent on either food or clothing (Hint: we assume there are no savings). If food is an inferior good, then, as income increases, consumption falls. With constant prices, the extra income not spent on food must be spent on clothing. Therefore, as income increases, more is spent on clothing, i.e. clothing is a normal good. 5. Which of the following combinations of goods are complements and which are substitutes? Could they be either in different circumstances? Discuss. a. a mathematics class and an economics class If the math class and the economics class do not conflict in scheduling, then the classes could be either complements or substitutes. The math class may illuminate economics, and the economics class can motivate mathematics. If the classes conflict, they are substitutes.
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