Download QUESTIONS FOR DISCUSSION

QUESTIONS FOR DISCUSSION
1.
Why do people routinely stuff themselves at “all-you-can-eat-buffets”? Explain in
terms of both utility and demand theories.
The law of demand states that as the price of an item decreases a
consumer will purchase more of a product. In this case, the cost of entry
is the only price paid. Once paid, all additional trips to the buffet line
have a price of zero. As a result, a consumer is making a rational choice
to consume until the marginal utility of the last bite consumed is zero and
equal to the price of the last item consumed.
2.
What does the demand for education at your college look like? What is on each
axis? Is the demand elastic or inelastic? How could you find out?
A graph constructed for this problem would have tuition on the vertical
axis and number of students who apply for college on the horizontal axis.
The demand curve would look like most demand curves, sloping
downward from left to right in accordance with the Law of Demand.
However, as the elasticity of the curve might vary from institution to
institution and person to person, its location and shape would vary. To
determine whether demand is elastic or inelastic, you could calculate the
elasticity by finding out how enrollment responded when tuition last
increased (keeping in mind the ceteris paribus assumption.)
3.
What would happen to unit sales and total revenue for this textbook if the
publisher reduced its price?
According to the Law of Demand, as price goes down, quantity (unit sales)
increases. What happens to total revenue, however, depends on the price
elasticity of demand. In general, the price elasticity of demand for
textbooks has an absolute value less than one. If that is the case, the
percentage increase in quantity sold is less than the percentage decline in
price and, as a result, the total revenue from sales would decline. In other
words, the decrease in price more than offsets the increase in quantity and
therefore total revenue (price times quantity) declines.
4.
If all soda advertisement were banned, how would Pepsi sales be affected? How
about total soda consumption?
The main purpose of advertising is to increase demand. If all soda
advertising were banned, then we would expect a decrease in demand
resulting in both a decrease in sales for Pepsi and a decrease in total
consumption of soda.
5.
How has the Internet affected the elasticity of demand for air travel?
The Internet has resulted in consumers having many more substitutes
available. As a result the price elasticity of demand has increased.
6.
Identify three goods each for which your demand is (a) elastic or (b) inelastic.
What accounts for the difference of elasticity?
Category (a) goods will include, in general, large budget items such as
new cars or items with many substitutes, such as specific vacation sites
and specific food items (chicken, beef, pork, etc.). Category (b) will most
likely include small budget items such as table salt or items with few good
substitutes such as gasoline and very broad categories of food (meat,
vegetables, fruit, etc.) Elasticities can differ between products due to
differences in prices relative to a consumer’s income, the number of
substitutes available, and the length of the time to respond.
7.
Utility companies routinely ask state commissions for permission to raise utility
rates. What does this suggest about the price elasticity of demand? Why is
demand so (in) elastic?
When a price increase results in an increase in revenue, demand is
relatively inelastic. Since utilities are asking for a rate (price) increase
presumably to increase revenue, this suggests that the demand for gas,
electricity, and local telephone service is inelastic. This inelasticity is
generated by the fact that these services tend to be necessities, have few
good substitutes, and, for some people, may be a relatively small portion
of income.
8.
Why is the demand for New York City cigarettes so much more price elastic than
the overall market demand for cigarettes (See Headline, p. 100)?
The price elasticity of demand for cigarettes in New York City is more
elastic than that in the overall market because smokers can purchase
cigarettes elsewhere. In general, the more substitutes, the greater the
price elasticity of demand.
9.
BuyMusic, a Windows-based music download site, was introduced in July 2003.
How will that affect the demand for iTunes (see Headline, p. 95)? the price
elasticity of demand?
In the near term, the demand for iTunes will not be impacted very much,
as so many people already own the necessary hardware, iPods, and they
may not be willing to purchase new hardware to utilize BuyMusic’s
service. Over a longer period of time, as current iPods become obsolete,
consumers will face more choices of hardware and software. Because
BuyMusic is a substitute for iTunes, the demand for iTunes could
decrease (or not increase as much) and the price elasticity of demand for
iTunes will become more elastic.