ps31 - *VISIT WEBSITE FOR TEST 1...

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* VISIT WEBSITE FOR TEST 1 http://kafuwong.econ.hku.hk/teaching/econ1 001/2006F/midterm1.html
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ECON1001 Tutorial 3
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Q1 Your economics professor told you that the quantity demanded of a good is higher when prices are lower, and the quantity demanded is lower when prices are higher. But you can think of a lot of people who would rather shop in an upscale mall than in a discount warehouse. This is A) inconsistent with the economic model because it shows that people are irrational. B) evidence that the abstract economic model of demand does not apply in the real world. C) because malls and warehouse stores are two different markets, so have different demand curves. D) because the supply curve is more important in determining where people like to shop. A) because the people you know have not studied economics. Ans: c
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Law of Demand P↑(↓) Qd ↓(↑) Negative relationship Purchase behavior within ONE market What is ONE MARKET/ ONE PRODUCT?
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Are they the same product? Watch: Swatch vs Rolex Clothing: Giordano vs Gucci Bags: Nike vs L.V. What kind of goods to include in a market depends on the purpose/scope of our analysis. Sometimes, close substitutes are grouped in the same market (i.e., the same product). Sometimes, we may not even distinguish Swatch and Rolex although they have very different customer bases. However, in Q1, the information suggested that the goods sold in the upscale and discount warehouse should be treated as two markets. That is, we can make sense of the observed phenomenon only when they are treated as two markets.
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Option D “because the supply curve is more important in determining where people like to shop.” The observation and this reason make little sense only if the supply of upscale is more than that of discount warehouse. That is, more people end up shopping in the upscale stores – at equilibrium. However, it does not seem reasonable to assume that the supply of upscale store is more than that of discount warehouse (or the cost of upscale store is lower than that of discount warehouse).
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Q2 Gertie saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they were $29.99. Therefore, A) Gertie should not buy the jeans because they will be of lower quality than she expected B) Gertie should not buy the jeans because the price is not equal to her reservation price. C) Gertie should only buy the jeans if she can negotiate a better price with the salesperson. D) Gertie should buy the jeans because the price is less than her reservation price. A) Gertie should buy the jeans because the price is more than her reservation price. Ans: d
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Buyer’s Reservation Price Definition: “the max price the consumer is willing to pay for an extra unit of product” Not that the vertical interpretation of demand curve is Marginal Benefit of consuming that unit.
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Buyer’s Reservation Price Decision to make: unit of purchase Cost-benefit principle suggests that buyers should buy
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This note was uploaded on 04/18/2011 for the course ECON 1001 taught by Professor S.c during the Spring '10 term at HKU.

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ps31 - *VISIT WEBSITE FOR TEST 1...

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