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Unit II: Supply, Demand, and Consumer Choice
Problem Set #2
1. EXPLAIN an experience or example that shows the “real world” application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept. a. The Law of Demand and the Law of Supply ( ____/5) Law of Demand: Downward slope, and inverse relation of price and quantity demand. When price of oranges goes up, the quantity demand will decrease, because of higher price, and substitutes. Law of Supply: Price and quantity has a direct relation, when price increases, quantity also increases. When the price of oranges increases, farmers will try to produce more, to maximize their profits. b. The Law of Diminishing Marginal Utility ( ____/5) When a person keeps buying the same product, this person will have decline in marginal utility from consuming additional products. A person that keeps buying a new Ferrari every week will eventually be bored of Ferrari, because of less utility provided by the Ferrari, and will change to buying Lamborghinis. c. Normal Goods and Inferior Goods ( ____/5) Normal goods are luxury goods, and the demand for normal goods will increase when one’s income increases. Tom got promoted, and his annual income increase from $20000 to $400000, and now he can own a Ferrari, instead of a Toyota. Inferior goods are cheap goods, and the demand for inferior goods will increase when one’s income decreases. Tom got fired, and got a new job, his annual salary decreased from $400000 to $20000, and now he has to sell his Ferrari to buy a Toyota. d. Consumer’s Surplus and Producer’s Surplus ( ____/5) Consumer surplus: Quantity demanded is greater than quantity supplied. Most of the earth’s trees are gone, and only few factories can produces paper. The amount of paper needed for the
Unit II: Supply, Demand, and Consumer Choice
Problem Set #2
1. EXPLAIN an experience or example that shows the “real world” application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept. a. The Law of Demand and the Law of Supply ( ____/5) Law of Demand: Downward slope, and inverse relation of price and quantity demand. When price of oranges goes up, the quantity demand will decrease, because of higher price, and substitutes. Law of Supply: Price and quantity has a direct relation, when price increases, quantity also increases. When the price of oranges increases, farmers will try to produce more, to maximize their profits. b. The Law of Diminishing Marginal Utility ( ____/5) When a person keeps buying the same product, this person will have decline in marginal utility from consuming additional products. A person that keeps buying a new Ferrari every week will eventually be bored of Ferrari, because of less utility provided by the Ferrari, and will change to buying Lamborghinis. c. Normal Goods and Inferior Goods ( ____/5) Normal goods are luxury goods, and the demand for normal goods will increase when one’s income increases. Tom got promoted, and his annual income increase from $20000 to $400000, and now he can own a Ferrari, instead of a Toyota. Inferior goods are cheap goods, and the demand for inferior goods will increase when one’s income decreases. Tom got fired, and got a new job, his annual salary decreased from $400000 to $20000, and now he has to sell his Ferrari to buy a Toyota. d. Consumer’s Surplus and Producer’s Surplus ( ____/5) Consumer surplus: Quantity demanded is greater than quantity supplied. Most of the earth’s trees are gone, and only few factories can produces paper. The amount of paper needed for the