Demand
1. How is an individual demand curve different from a market demand curve? Which curve is
likely to be more price elastic? Is the demand for a particular brand of product, such as Head
skis, likely to be more price elastic or price inelastic than the demand for the aggregate of all
brands of downhill skis? Explain (1 point)
2. By observing how Bill behaves, determine the relevant income elasticities of demand for
each good (i.e. whether the good is normal or inferior) (1 point)
a) Bill spends all of his income on coffee and books. He finds $20 while rummaging
through a used paperback bin at the bookstore, and immediately buys a new
hardcover book of poetry.
b) Being bohemian becomes the latest teen fad. As a result, coffee and book prices both
rise 25%. Bill lowers his consumption of both goods by the same percentage.
3. Suppose that Anna’s price elasticity of demand for food = -1.0. Suppose also that she spends
$10,000 a year on food, and that that the price of food is $2. If a $2 sales tax on food were to
cause the price of food to double, what would happen to Anna’s consumption (Hint: as a
large price change is involved, you should use an arc elasticity, rather than a point elasticity).
(1 point)
4. Consumption of pounds of hamburger per year by a typical consumer has been estimated as
follows (2 points):
Price ($) Income
$20,000 per year $30,000 per year
0.50 1,000 lbs 1,500 lbs
1.00 900 1,100
1.50 800 900
a) Estimate the arc price elasticities of demand when I = $20,000, and when I = $30,000.
What pattern do you observe?
b) Sketch the Engel curves implied by these data.
5. Suppose that the average household consumers 500 gallons of gas per year. A 10-cent
gasoline tax is introduced, combined with a $50 annual tax rebate per household. Will the
household be worse or better off after the new program is introduced? (1 point)
6. Assume orange juice and apple juice are perfect substitutes. Draw the appropriate price-
consumption curve (for a variable price of orange juice), and income-consumption curve (1
point)
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