Unit II: Supply, Demand, and Consumer Choice
Problem Set #2
1. EXPLAIN an experience or example that shows the “real world” application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept. a. The Law of Demand and the Law of Supply ( ____/5) Law of Demand: Downward slope, and inverse relation of price and quantity demand. When price of oranges goes up, the quantity demand will decrease, because of higher price, and substitutes. Law of Supply: Price and quantity has a direct relation, when price increases, quantity also increases. When the price of oranges increases, farmers…show more content…
(____/5) Elasticity means flexible, and means there are substitute for that product. An elastic product would be Diet coke, when the price of Diet coke goes up, others would drink other kind of sodas, such as Diet Pepsi. Inelastic means inflexible, and it means there are no substitutes for that product. An inelastic product would be gasoline, because there is only one kind of gasoline.
b. EXPLAIN how the total revenue test can be used to determine if a demand curve is elastic or inelastic. Use two graphs with numerical examples in your response. ( ____/5)
6. Utility Maximization
You just won a $100 shopping spree at a store that sells only DVDs and CDs. You are trying to determine what combination of these two goods would maximize your utility. The price of CDs is $10 and DVDs are $20. Below is the total utility you receive from consuming these goods.
|CDs |Total Utility | | |DVDs |Total Utility | | |
|1 |60 | | |1 |160 | | |
|2 |110 | | |2 |300 | | |
|3 |150 | | |3