CHAPTER4INDIVIDUALANDMARKETDEMANDQUESTIONSFORREVIEW1.Explainthedifferencebetweeneachofthefollowingterms:a.apriceconsumptioncurveandademandcurve;Apriceconsumptioncurveidentifiestheutilitymaximizingcombinationsoftwogoodsasthepriceofoneofthegoodschanges.Whenthepriceofoneofthegoodsdeclines,thebudgetlinewillpivotoutwards,andanewutilitymaximizingbundlewillbechosen.Thepriceconsumptioncurveconnectsallsuchbundles.Ademandcurveisagraphicalrelationshipbetweenthepriceofagoodandthe(utilitymaximizing)quantitydemandedofagood,allelsethesame.Priceisplottedontheverticalaxisandquantitydemandedonthehorizontalaxis.b.anindividualdemandcurveandamarketdemandcurve;Anindividualdemandcurveidentifiesthe(utilitymaximizing)quantitydemandedbyonepersonatanygivenpriceofthegood.Amarketdemandcurveisthesumoftheindividualdemandcurvesforanygivenproduct.Atanygivenprice,themarketdemandcurveidentifiesthequantitydemandedbyallindividuals,allelsethesame.c.anEngelcurveandademandcurve;Ademandcurveidentifiesthequantitydemandedofagoodforanygivenprice,holdingincomeandallelsethesame.AnEngelcurveidentifiesthequantitydemandedofagoodforanygivenincome,holdingpricesandallelsethesame.d.anincomeeffectandasubstitutioneffect;Thesubstitutioneffectmeasurestheeffectofachangeinthepriceofagoodontheconsumptionofthegood,utilityheldconstant.Thischangeinpricechangestheslopeofthebudgetlineandcausestheconsumertorotatealongthecurrentindifferencecurve.Theincomeeffectmeasurestheeffectofachangeinpurchasingpower(causedbyachangeinthepriceofagood)ontheconsumptionofthegood,relativepricesheldconstant.Forexample,anincreaseinthepriceofgood1(onthehorizontalaxis)willrotatethebudgetlinedownalongtheindifferencecurveastheslopeofthebudgetline(therelativepriceratio)changes.Thisisthesubstitutioneffect.Thisnewbudgetlinewillthenshiftinwardstoreflectthedeclineinpurchasingpowercausedbytheincreaseinthepriceofthegood.Thisistheincomeeffect.3.Explainwhetherthefollowingstatementsaretrueorfalse.a.Themarginalrateofsubstitutiondiminishesasanindividualmovesdownwardalongthedemandcurve.Thisistrue.TheconsumerwillmaximizehisutilitybychoosingthebundleonhisbudgetlinewherethepriceratioisequaltotheMRS.Supposetheconsumerchoosesthequantityofgoods1and2suchthatP1P2MRS.Asthepriceofgood1falls,thepriceratiobecomesasmallernumberandhencetheMRSbecomesasmallernumber.Thismeansthatasthepriceofgood1falls,theconsumeriswillingtogiveupfewerunitsofgood2inexchangeforanotherunitofgood1.b.Thelevelofutilityincreasesasanindividualmovesdownwardalongthedemandcurve.Thisistrue.Asthepriceofagoodfalls,thebudgetlinepivotsoutwardsandtheconsumerisabletomovetoahigherindifferencecurve.c.Engelcurvesalwaysslopeupwards.Thisisfalse.TheEngelcurveidentifiestherelationshipbetweenthequantitydemandedofagoodandincome,allelsethesame.Ifthegoodisinferior,thenasincomeincreases,quantitydemandedwilldecrease,andtheEngelcurvewillslopedownwards.5.Whichofthefollowingcombinationsofgoodsarecomplementsandwhicharesubstitutes?Couldtheybeeitherindifferentcircumstances?Discuss.a.amathematicsclassandaneconomicsclassIfthemathclassandtheeconomicsclassdonotconflictinscheduling,thentheclassescouldbeeithercomplementsorsubstitutes.Themathclassmayilluminateeconomics,andtheeconomicsclasscanmotivatemathematics.Iftheclassesconflict,theyaresubstitutes.b.tennisballsandatennisracketTennisballsandatennisracketarebothneededtoplayagameoftennis,thustheyare...
