S1W6

Vlad the Vampire spends all his income on blood and bats. His demand curve for bats is elastic.
True or false: If the price of bats rises, he consumes more blood. Explain.

• True

• False

Answer explanation

True. The demand for bats is elastic. When their price goes up, the total expenditure on bats
goes down. Thus, the share of income available for blood increases. Since the price of blood is
constant he consumes more blood.
2

Suppose your budget is spent entirely on two goods: pumpkins and Lidl’s own brand halloween
sweets. If pumpkins are an inferior good, can halloween sweets be inferior as well?

• Yes

• No

Answer explanation

No. If pumpkins are an inferior good, then as income increases, quantity demanded of pumpkins
decreases. If halloween sweets were an inferior good also, then likewise, quantity demanded
of halloween sweets would decline as income grows. However, spending on both goods cannot
decline, because there would be no way of spending the additional income. Thus, not all goods
can be inferior. Of course, most people consume many goods, and in that case there can be
more than one inferior good – the point here is that all goods cannot be inferior at once, even in
theory (though in theory there could be no inferior goods and all normal goods).

Which of these are examples of inferior goods:

• Hotel Chocolat Halloween Chocolates

• Toffee apples on reduced to clear, because the packaging is damaged.

• A second-hand halloween costume in the charity shop

• Tesco Finest Cobweb Cheesecake

Suppose the demand curve for halloween sweets is given by P = 100 − 1/3 Q. Find the elasticity
of demand when P = 30.

Answer explanation

-3/7

Is the quantity of pumpkins demanded during Halloween responsive or unresponsive to a change in price? What about the responsiveness to the price of a specific firm?

• Responsive, Unresponsive

• Unresponsive, Unresponsive

• Unresponsive, Responsive

• Responsive, Responsive

Answer explanation

During Halloween, the demand for pumpkins increases so much, that for many it becomes a "necessity", meaning it has high inelastic demand, and the income effects are small due to pumpkins' low price. Therefore, the quantity demanded is unlikely to be responsive to a change in price. When it comes to a firm's pumpkins, they are likely to be very responsive. This is because there are many firms selling pumpkins, and so consumers will switch where they buy their pumpkins.

On Halloween night Jack and his friends went trick or treating. A very generous household gave Jack a $100 bill. Jack was delighted and immediately thought to use this money to buy his costume for next year, a high-quality Jack the Reaper costume. On November 1st, the costume he had in mind dropped in price by a third. True, False, or Uncertain: Jack will always buy more costumes.

• True

• False

• Uncertain

Answer explanation

False. In the case of income rising and the price falling for a standard (non-Giffen) inferior good, then the effects will be in opposite directions; the income rise will tend to cause fewer units to be purchased, but the price fall will tend to induce more units to be purchased. We can’t say what the net effect is without knowing more about the magnitude of the changes and the consumer’s preferences. In our case, we can assume that for Jack buying 2 costumes would be a bad use of his new income and his preferences probably lay elsewhere. In general, when making predictions using economic theory, it is best to change only one parameter at a time.

In 2021 the Edinburgh Bargain store sold the chucky mask and the chucky overalls separately. In
2021 the mask cost €15 and sold 300 units. The overalls cost €10 and sold 200 units. In 2022,
they increased the price of the overalls to €15 and sold 100 units instead. The price of the mask
stayed at €15 but instead only sold 200 units. Calculate the cross-price elasticity of demand for
the mask with respect to the overalls in 2021, and determine whether the goods are substitutes
or complementary goods.

Answer explanation

The week before Halloween Dracula was trying to gain a better understanding of the elasticity of demand. He feels that a better understanding of this will give him an understanding of why he chooses to buy blood at certain prices but not others. Which of the following formulas shows how Dracula could calculate the price elasticity of demand?

• All of the above.

Answer explanation

Wednesday wants to pick a dress for the coming Halloween Party. Suppose the market for black dresses is currently untaxed, and that P = €10 and Q = 1000 units. Now the government is considering imposing a tax of €1 per unit on suit sales. Other things being equal, which of the following conditions will result in a relatively small change in the number of black dresses sold?

i. The supply curve is highly inelastic

ii. The supply curve is highly elastic

iii.The demand is highly inelastic

iv. The demand curve is highly elastic curve

• A all of the above

• B i, iii

• C ii, iii

• D iii, iv

• E i, iv

Answer explanation

EXPLANATION:

When either a supply or a demand curve is inelastic, the quantity is not very responsive to price. So, when the tax is imposed, the quantity will not change much if both curves are inelastic.

If one extra candy apple raises Steve’s utility by 6 units and one extra jellybean will increase it by 4 units, what must be the price of a candy apple if the jellybean costs $6?

Answer explanation

EXPLANATION:} \\

MRS = 2/3 = PT /PB

2/3 = 6/PB

PB = 9

The marginal rate of substitution is also equal to the ratio of the price of the good on the vertical axis to the price of the good on the horizontal axis. Therefore candy apples must be 1.5 times more expensive than jellybeans considering their relative marginal utilities. As a result, candy apples should be priced at $9 per unit. This question is a follow-up to the previous question, also featured on the Week 5 tutorial sheet.