K Given the following data: Consumer Income Y = $40 P₁ = $4 P₂ = $5 a. Which of the following bundles are attainable with these prices and income? Good Z 10- 9 8- 7- 6- 5 4- 3- 2 1- E A с 5 Good X 20 7 8 9 10 G
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- What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?If a 10 decrease in the price of one product that you buy causes an 8 increase in quantity demanded of that product, will another 10 decrease in the price cause another 3 increase (no more and no less) in quantity demanded?Economists define normal goods as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is greater than one. Think about products that would fall into each category. Can you come up with a name for each category?
- Would you expect total utility to rise or fall with additional consumption of a good? Why?Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume? Explain. Hint: Think about how the price elasticity of demand will differ between necessities and luxuries.Income effects depend on the income elasticity ofdemand for each good that you buy. If one of the goodsyou buy has a negative income elasticity, that is, it is aninferior good, what must be true of the income elasticityof the other good you buy?
- 7.If pizza is a normal good, then which of the following could be the value of incomeelasticity of demand?(2marks)a) 0.2.b) 0.8.c) 1.4d) All of the above.A TV channel has estimated the demand for its service to be givenby the following function: Q=9.83p-1.2A2.5Y1.6P0-1.4whereQ = monthly sales in unitsP = price of the service in $A = promotional expenditure in $’000Y = average income of the market in $’000P0 = price of ‘home movies’ in $ The current price of the TV channel is $60, promotional expenditure is$120,000, average income is $28,000, and the price of ‘homemovies’ is$45.Indicate whether the following statements are true or false, givingyour reasons and making the necessary corrections h. Current sales are over a million units a month. i. The demand curve for the channel is given by:Q=9.83p-1.2j. The channel’s sales are more affected by the price of ‘home movies’ than by the price of its own service.k. If the channel increases its price this will reduce its profit.Suppose the linear demand curve for shirtsslopes downward and that consumers buy 500 shirts per yearwhen the price is $30 and 1,000 shirts per year when the priceis $25.a. Compared to the prices of $30 and $25, what can you sayabout the marginal valuation that consumers place on the300th shirt, the 700th shirt, and the 1,200th shirt they mightbuy each year?b. With diminishing marginal utility, are consumers derivingany consumer surplus if the price is $25 per shirt? Explain.c. Use a market demand curve to illustrate the change in consumersurplus if the price drops from $30 to $25.
- 2. The demand for good X is given by:d= 6,000 - 0.5Px - Py +9Pz + 0.1MQxResearch shows that the prices of related goods are given by Py = $6,500 and Pz = $100, while theaverage income of individuals consuming this product is M = $70,000. a. How many units of good X will be purchased when Px = $5,230? b. Determine the demand function and inverse demand function for good X. Graph the demand curve forgood X.The demand for your product X has been estimated to beQX = 7, 880 − 4PX − 2PY + PZ − 0.1Mwhere Y and Z are other (related) products. The relevant price and income data are asfollows: PX = 10, PY = 15, PZ = 50, M = 40, 000a. Which goods are substitutes for X? Which are complements?b. Is X an inferior or a normal good?c. How much X will be purchased?d. Graph the demand curve for X given the above information.e. How will the demand curve change if M falls to 35, 000? Is that in line with b.?Suppose there is a single commodity that absorbs all of a consumer's income. a. What is the consumer's price elasticity of demand for the commodity? b. What is the consumer income elasticity of demand for the commodity?
