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Chapter 6: Q.17 (page 153)

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 8% increase (no more and no less) in quantity demanded?

Short Answer

Expert verified

Elasticity grows as price and quantity fall, the second 10%decline in price would be expected to be accompanied by a quantity increase of more than 8%.

Step by step solution

01

Step 1:Definition

Total Utility and Marginal Utility:

In economics, total utility and marginal utility are concepts under utility that assist determine a consumer's level of satisfaction. The total utility refers to the whole amount of pleasure derived by a customer from the consumption of a specific amount of products. Marginal utility, on the other hand, refers to the additional utility gained by a consumer from the consumption of one additional unit of the good.

02

Explanation

A second ten percent reduction in price does not imply a rise in demand of another eight percent. As prices continue to fall, demand elasticity will rise in general. With this second identical price cut, demand is anticipated to increase by more than 8%.

03

Step 3:Conclusion

It is true since, considering demand elasticity increases as price and quantity fall, the subsequent 10% price drop should be accompanied by a quantity increase of more than 8%.

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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?

As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

Why does a change in income cause a parallel shift in the budget constraint?

Would you expect the total utility to rise or fall with additional consumption of a good? Why?

1. 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.
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