I need help to solve these problems Problem 3 Consumer\'s Problem This problem i

Question

I need help to solve these problems

Problem 3 Consumer's Problem This problem is designed to help you see why economists typically draw downward sloping demand curves. (a) given that tastes are rational, strictly monotone, strictly convex, and continuous, under what unlikely conditions will individual demand curves be upward sloping? (hint: refer the direction and relative size of income and substitution effects) (b) Assuming preferences are homothetic in i and SotherCons and tastes are rational, strictly monotone, strictly convex, and continuous, graphically derive the consumer's demand curve for ri. Is it downward sloping? (c) Assuming preferences are quasilinear in ai and SotherCons (where ri is the quasilinear good) and tastes are rational, strictly monotone, strictly convex, and continuous, graphically derive the consumer's demand curve for ri. Is it downward sloping? d) In which case is the demand curve steeper? why? (e) How do the price elasticities of demand compare for the two demand curves? Which is larger in absolute value?

Explanation / Answer

1. a) Demand refers to the quantities of commodities that the consumers are able and willing to buy at each possible price during a given period of time other things being equal.

The law of demand states that other things being equal, the quantity demanded increases with a fall in price and diminishes when price increases. It states that other things remaining equal, there is an inverse relationship between the price and the quantity demanded. For example, if the price of the car falls, people will buy more of it. Thus, demand curve is downward sloping.

However, there are certain exceptions that represents demand curve as upward sloping. Following are the conditions where demand curve is upward sloping:

A) Luxury goods & services: Higher prices may sometimes increase demand for some products & services. For example, luxurious commodities such as luxury cars, costly designer apparels, etc. Such commodities represent high status and identify the individual as persons of wealth and taste. High price of such goods makes the demand increase for such luxury goods.

B) Inferior goods: These are goods whose demand falls when income rises. The consumption of such goods decrement as soon as the income increment. For example: low quality rice, staple foods, cheaper cars, etc. Thus, as the price of inferior goods fall, demand for such goods decreases.

C) Fear of scarcity: Fear of scarcity of essential goods makes the individuals purchase them even when their prices are high since they believe that if they did not purchase in advance, other consumers may buy them.

D) Anticipation of natural calamities: Natural calamities such as droughts, floods, etc make the consumers purchase goods in advance even when they are available at higher prices, making the demand increase.

b) In case, the preferences are homothetic, which implies increase in income level which makes the demand curve upward sloping.

c) In case, the preferences are quasilinear, this implies negative income effect which makes the demand curve downward sloping.

d) The demand curve is steeper when the demand curve is upward sloping which means the preferences are homothetic.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.