(a)
To explain:
The impact on
Answer to Problem 1CACQ
There will be fall in demand of goods X.
Explanation of Solution
There is a leftward shift in demand curve. This is because when there is decrease in income, it leads to fall in demand. This is because the commodity is normal goods. So, there is a positive relation between demand and income.
In the below diagram, DD is the initial demand curve and P is the price line. As income falls, it leads to leftward shift of demand curve from DD to D1. Quantity falls from Q to Q1.
Figure 1: Decrease in the income of consume shifts demand curve leftwards
Thus, when income of the consumer decreases, the demand of goods X decreases from Q to Q1 keeping price of goods X fixed.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
(b)
To explain:
The impact on demand for goodsY due to increase in income.
Answer to Problem 1CACQ
There will be fall in demand of goodsY.
Explanation of Solution
There is a leftward shift in demand curve. This is because when there is increase in income, it leads to fall in demand as goods is an inferior goods. So, there is an inverse relation between demand and income, thus decreasing the demand of inferior goods.
In the below diagram, DD is the original demand curve, P is the initial price line. As income of a consumer increases, it leads to leftward shift of demand curve from DD to D1. This is because goods in question is an inferior goods.
Figure 2: Increase in the income of consumer shifts demand curve of Goods Y (Inferior Goods) leftwards
Thus, when income of the consumer increases, the demand of goods Y decreases from Q to Q1 keeping price of goods Y fixed.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
(c)
To explain:
The impact on demand for goods X due to increase in price of goods Y.
Answer to Problem 1CACQ
The demand for goods X increases when price of goods Y increases.
Explanation of Solution
It is given that the goods X and goods Y are substitute goods which mean that consumer can use these goods in place of one another. Substitute goods are those goods which are used in place of each other. Price of goods X leads to increase in demand for goods Y.
Goods are substitutable in nature. Demand of a goods is affected when price of related goods changes.
The diagram given below shows the effect of increase in the price of goods Y on the demand of goods X.
Figure 3: Demand curve of goods X shifts rightwards as price its substitute goods (Goods Y) increases.
In Figure-3, DD is the original demand curve, P is the price line. As there is an increase in price of goods Y, it leads to shift in demand curve from DD to D 1. Therefore, demand for goods X increases when price of goods Y increases.
Substitute goods:
Substitute goods are those which can be used in place of each other. These goods have a positive cross elasticity.
Complementary goods:
Complementary goods are those which are used together. These goods have negative cross elasticity.
(d)
To explain:
Whether goods Y is a lower quality product than goods X.
Answer to Problem 1CACQ
No, quality of goodsY cannot be determined.
Explanation of Solution
Inferior goods do not mean it is of sub-standard quality. The goods are said to be inferior in nature when the relationship between income of consumer and the demanded quantity of goods is indirect.
As income of consumer rises, it leads to decrease in demand of a commodity, this is because, consumer shifts its demand to a goods which is better than the goods consumed.
As income falls, it leads to increase in consumption of a goods. So, quality of goods Y cannot be determined.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
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Chapter 2 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
- Classifying a good as rival means A. that the good is produced in a competitive market. B. anyone who does not pay for the good cannot consume it. C. that there is a shortage of the good. D. that when one person consumes a unit of the good no one else can consume it.arrow_forwardQuestion The following appeared in an article in the Wall Street Journal: “Last week, true to discount roots dating to 1971, Southwest [Airlines] launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major competitors were forced to follow suit.” Why would other airlines be “forced” to follow Southwest’s fare decrease? What if this fare decrease took place during an economic recession, when incomes and the demand for airline travel were falling?arrow_forwardSuppose a firm sells two goods, Good A and Good B. Use the following information to Calculate the mark-up and the profit-maximizing price that the firm should change for Good B. Profit maximizing price of Good A = $6000 MC at profit-maximizing level of output of Good A = $1200 MC at profit-maximizing level of output of Good B = $400 Total revenue of Good A = $80000 Total revenue of Good B = $68000 Rothschild index of Good B = 0.6 Price elasticity of the market demand for Good B = -1.2arrow_forward
- 1. The X-Corporation produces a good (X) that is a normal good. Its competitor, Y-Corp. makes asubstitute good that it markets under the name (Y).a. How will the demand for good X change if consumer incomes decrease?b. How will the demand for good X change if the price of good Y increases?arrow_forward(Please, use graph to solve this problem) A good can be produced in a competitive industry at a cost of $10 per unit. There are 100 consumers are each willing to pay $12 each to consume a single unit of the good (additional units have no value to them.) What is the equilibrium price and quantity sold? The government imposes a tax of $1 on the good. What is the deadweight loss of this tax?arrow_forwardSuppose in a small town called Utopia live 200 children and 300 adults. The only entertainment in the town is a theatre. The theatre has a fixed cost of 2000 dollars for preparing each play. However, once the play is ready, then selling an additional ticket has no cost at all. Demand for adult citizens and children are given in the following table What price would this theatre company charge for an adult ticket and for a child’s ticket? How much will it make?arrow_forward
- At a price $12 per unit, Gadgets incorporated is willing to supply 24,000 gadgets, while United Gadgets is willing to supply 16,000 gadgets. If the price were to rise to $15 per unit, their respective quantities supplied would rise to 27,000 and 21,000. If these are the only two firms supplying gadgets, what is the elasticity of supply in the market for gadgets?arrow_forwardSnooki, a new marketing intern, was a little scatterbrained during the first meeting with her manager, when she made four statements about pricing. Which one of her four statements about pricing was correct? a. A product with an elastic demand is likely to face little competition. b. An EDLP retailer offers many price promotions. c. A product with an elasticity of demand of -0.7 will enjoy increases in revenue when prices are cut. d. Cost-plus pricing is not the perfect pricing strategy because the pricing method ignores customers’ willingness to pay and competitors’ pricing strategy.arrow_forwardHome work CH 6.34 In 2005 Uber and Lyft had not entered the market yet and the New York City taxi cab commission could set prices and restrict entry into the market for taxi cab rides. New York City taxi cabs provided a quantity of 100 rides in 2005. For simplicity, suppose every taxi cab ride was identical. Each ride lasted 10 miles and the price of each ride was $50. At this price, the price elasticity of demand was -5.0. Taxi drivers in this market faced two costs. First was the cost of purchasing a yellow Ford Crown Vic taxi cab. Second was the cost of gasoline, which was $2 per gallon at the time. The Ford Crown Vic could travel 20 miles for each gallon of gasoline. If the New York City taxi cab commission's objective were to maximize economic profits, what price should they charge for each ride? (Hint, first find the demand curve.)arrow_forward
- You live in a town with 300 Adults and 200 children, and you arc thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of $2,000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customer: a. To maximize profit, what price would you charge for an adult ticket? For a child's ticket?How much profit do you make?b. The city council passes a law prohibiting you from charging different prices to different customers. What price do you set for a ticket now? How much profit do you make?c. Who is worse off because of the law prohibiting price discrimination? Who is better off? (If you can, quantify the changes in welfare.)d. If the fixed cost of the play were $2,500 rather than $2,000, how would your answers to parts (a), (b), and (c) change?arrow_forwardShell has over 13,000 gas stations in the United States. In addition to gasoline, the gas stations also sell convenience items, such as snacks, non-alcoholic beverages, wine, beer, and hot food. Suppose you work for a gas station and your boss asks you to develop a pricing strategy for bottled local wine. The demand function is ? = 100 – 4?, where ? is the monthly quantity demanded of the bottled wine and ? is the price of the bottled wine. The marginal cost per bottle of wine is $5. Complete the following tasks: 1) (Calculating) In the worksheet “Q2 Calculations” of the provided Excel file, enter formulas in columns B-D to calculate Q (quantity demanded), MC (marginal cost), and MR (marginal revenue). Please round your results to one decimal place. Note that the inverse demand function is ? = 25 − 0.25? and that the MR function can be derived from the inverse demand function using the formula introduced in Module 5. You may find it helpful to review the Excel file for Chapter 11.arrow_forwardConsider the supplier of a product that is an inferior good. For instance, an aluminum supplier for a canned goods producer. During a recession during which average incomes fall, which of the following best describes what would happen to the profit-maximizing price of the supplier? a. The supplier’s profit-maximizing price would decrease due to an increase in demand. b. The supplier’s profit-maximizing price would increase due to an increase in demand. c. The supplier’s profit-maximizing price would decrease due to a reduction in demand. d. The supplier’s profit-maximizing price would increase due to a reduction in demand.arrow_forward
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
