Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 6: Q. 3 (page 151)

Explain all the reasons why a decrease in a product's price would lead to an increase in purchases.

Short Answer

Expert verified

Due to substitution and income effect, a decrease in a product's price will cause a rise in purchases.

Step by step solution

01

Step 1. Introduction:

An individual seeks to raise consumption utility with respect to the budget constraint. When income or price fluctuates, the budget constraint paradigm suggests that a variety of solutions are feasible.

02

Step 2. Explanation:

A commodity price reduction has both a substitution and an income effect. The substitution effect states that because the product is less expensive in comparison to other items the consumer buys, he or she will buy more of it (and less of the other things). According to the income impact, after a price decrease, a consumer could buy the same things as before and yet have money left over to buy more. A fall in price produces a rise in quantity demanded for both reasons.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?

Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?

Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy’s consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.

Round TripsTotal UtilityPhone MinutesTotal Utility
0000
18020200
215040380
321060540
426080680
5300100800
6330120900
7200140980
81801601040
91601801080
101402001100

As a general rule, is it safe to assume that a change in the price of a good will always have its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free