Chapter 6: Problem 8
"If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand." True or false? Explain.
Chapter 6: Problem 8
"If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand." True or false? Explain.
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Get started for free[Uses the Indifference Curve Approach] With the quantity of popcorn on the vertical axis and the quantity of ice cream on the horizontal axis, draw indifference maps to illustrate each of the following situations. (Hint: Each will look different from the indifference maps in the appendix, because each violates one of the assumptions we made there.) a. Larry's marginal rate of substitution between ice cream and popcorn remains constant, no matter how much of each good he consumes. b. Heather loves ice cream but hates popcorn.
What would happen to the market demand curve for polyester suits, an inferior good, if consumers' incomes rose?
The Smiths are a low-income family with \(\$ 10,000\) available annually to spend on food and shelter. Food costs \(\$ 2\) per unit, and shelter costs \(\$ 1\) per square foot per year. The Smiths are currently dividing the \(\$ 10,000\) equally between food and shelter. Use either the Marginal Utility Approach or Indifference Curve Approach. a. Draw their budget constraint on a diagram with food on the vertical axis and shelter on the horizontal axis. Label their current consumption choice. How much do they spend on food? On shelter? b. Suppose the price of shelter rises to \(\$ 2\) per square foot. Draw the new budget line. Can the Smiths continue to consume the same amounts of food and shelter as previously? c. In response to the increased price of shelter, the government makes available a special income supplement. The Smiths receive a cash grant of \(\$ 5,000\) that must be spent on food and shelter. Draw their new budget line and compare it to the line you derived in part \(a .\) Could the Smiths consume the same combination of food and shelter as in part \(a ?\) d. With the cash grant and with shelter priced at \(\$ 2\) per square foot, will the family consume the same combination as in part \(a ? \mathrm{Why}\), or why not?
Which of the following descriptions of consumer behavior violates the assumption of rational preferences? Explain briefly. a. Joseph is confused: He doesn't know whether he'd prefer to take a job now or go to college full-time. b. Brenda likes mustard on her pasta, in spite of the fact that pasta is not meant to be eaten with mustard. c. Brewster says, "I'd rather see an action movie than a romantic comedy, and I'd rather see a romantic comedy than a foreign film. But given the choice, I think I'd rather see a foreign film than an action movie."
Larsen E. Pulp, head of Pulp Fiction Publishing Co., just got some bad news: The price of paper, the company's most important input, has increased. a. On a supply/demand diagram, show what will happen to the price of Pulp's output (novels). b. Explain the resulting substitution and income effects for a typical Pulp customer. For each effect, will the customer's quantity demanded increase or decrease? Be sure to state any assumptions you are making.
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