Questions on Consumer's Budget

willingness to pay goes down. When this happens, consumers turn to alternate goods that may not be as efficient or as high in status, but still get the job done. If the price of butter goes up,

It is a definite tie in to the previous principle as most consumers are looking to get the most for the least. Restaurants are starting to use promotions of smaller portions for smaller prices in order to compete with the growing money saving tight budgeted crowd. Mankiw (2007) provides a great example of this by stating “For example, when the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher. As we will see, the effect of a good’s price on the behavior of buyers and sellers in a market—in this case, the market for apples—is crucial for understanding how the economy allocates scarce resources.” (p. 7)

In consumption, it is believed trends travel from the upper classes to the lower class as those from a lower social status seek to emulate those of a higher social status, this is referred to as the trickle-down effect (Trigg et al., 2001).

1. When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. In this range of prices, demand for this product is ( )

____ 16. If two goods are ____, then an increase in the price of one leads to ____ in the quantity demanded of the

Suppose the marginal utility of the last unit of X consumed is 40, and the marginal utility of the last unit consumed of Y is 30. The prices of X and Y are $4 and $2, respectively. Should the consumer increase or decrease consumption of X? Explain carefully

Tendency to change your purchase based on changes in relative price is called the substitution effect.

more. The more that item is produced the more the people will spend which increasing the

For instance, if someone's income grows, then his demand for goods will increase, shifting his demand curve to the right. This will lead to a higher quantity being consumed at a higher price, ceteris paribus. Conversely, there can be a negative effect that shifts the supply curve to the left where a lower quantity is consumed at a lower price, ceteris paribus. This can occur when the price of substitutes falls or consumers begin to lose their taste for the product.

Three reasons the aggregate-demand curve slopes downward are the wealth effect, the interest-rate effect, and the exchange rate effect. The wealth effect explains that when the price level decreases, each consumer is wealthier because the real value of his or her dollar has increased. Wealthier consumers spend more, increasing the demand for consumption goods and services. Conversely, if the price level rises, the real value of the dollar will decrease, effectively making consumers poorer. Poorer consumers will spend less on consumption, decreasing the demand for goods and services.

The following graph demonstrate the demand curve of how many items of a product or service a consumer would like to purchase at different prices. Now by having the product at a lower price, the more a consumer is likely to buy. For that same reason it can be concluded that the price is one major factor of the product demand.

b) In a monopolistic market, the price will be greater than marginal cost and thus than the

The consumers and producers behave differently. To explain their behavior better economists introduced the concepts of supply and demand. In short words, the law of demand states that with price increase quantity demanded of a good or services decreases, and the law of supply states that quantity of a good produced increase if the market price of that good increases. Of course, it is just general rule and does not explain all varieties of factors impacting the supply and

Using the same amount of resources to produce two goods. Draw PPF curve and explain the reason of each question.

Marketing of income-sensitive goods has to take into consideration the shifts in personal income and savings habits.