4. The demand curve The following calculator shows the demand curve for sedans (
ID: 1133406 • Letter: 4
Question
4. The demand curve The following calculator shows the demand curve for sedans (for example, Toyota Camrys or Honda Accords) in New York City. For simplicity, assume that all sedans are identical and sell for the same price. Initially, the calculator shows market demand under the following circumstances: Average household income is $50,000 per year, the price of a gallon of regular unleaded gas is $4 per gallon, and the price of a subway ride is $2.00. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Tool tip: Use your mouse to drag the green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You can also directly change the values in the boxes with the white background by clicking in the box and typing. When you click the Calculate button, the graph and any related values will change accordingly. CALCULATOR PRICE (Thousands of dollars per sedanl 50 + Price of a Sedan IThousands of dollars 20 Quantity Demanded Sedans per monthl 40 400 30 DEMAND SHIFTERS Current Values Initial Values 20 Average Income 50 50 Theusends of lrs Price of Gas Dollars per gallen Price of a Subway Ride 10 0 100 200 300 400 500 600 700 800 900 QUANTITY (Sedans the demand Consider the graph. Suppose that the price of a sedan increased from $10,000 to $15,000. This would cause a curve. An increase in average income causes a rightward the demand curve; therefore, you may conclude that sedans are good. (Hint: Try substituting different values for Average Income in the calculator, and observe what happens.) Suppose that the price of a subway ride rises from $2.00 to $2.50. Because driving a car and taking the subway are in the price of a subway ride shifts the demand curve for sedans to the , an increaseExplanation / Answer
If the price of a sedan increased from $10,000 to $15,000, this would cause a upward movement along a demand curve. The reason is that we are given the demand curve for sedans so if there is a change in the price of sedans there is always a movement along the demand curve.
An increase in average income causes a rightward shift in the demand curve;therefore, you may conclude that sedans are normal good. The reason is that whenever there is an increase in the income and when the good is a normal good then the demand for that good increases. An increase in income will cause a rightward shift in the demand curve, other things being constant.
Because driving a car and taking the subway are subsitutes, an increase in the price of a subway ride shifts the demand curve for sedans to the right.
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