chapter 6: demand

Question 1

Marshallian demand functions

Answer 1

The consumer’s Marshallian demand functions give the optimal amounts of each good as a function of the prices and income faced by a consumer

Question 2

Comparative statics

Answer 2

Comparative statics studies how a choice responds to changes in prices or income.

Question 3

normal good

Answer 3

A normal good is a good for which demand increases when income increases:
∆x1/∆m> 0.

Question 4

An inferior good

Answer 4

An inferior good is a good for which demand decreases when income increases:
∆x1/∆m< 0.

Whether a good is inferior or not depends on the income level.

Question 5

income offer curve

Answer 5

The income offer curve illustrates the bundles of goods that are demanded at different levels of income.

The income offer curve is also known as the income expansion path. If both goods are normal, then the income expansion path will have a positive slope.

Question 6

Engel curve

Answer 6

The Engel curve is a graph of the demand for one good as a function of income, with all prices being held constant.

Question 7

luxury good

Answer 7

If the demand for a good goes up by a greater proportion than income, we say that it is a luxury good.

Question 8

necessary good.

Answer 8

If the demand for a good goes up by a smaller proportion than income, we say that it is a necessary good.

Question 9

homothetic preferences.

Answer 9

If preferences depend only on the ratio of good 1 to good 2, the consumer has homothetic preferences.

A consumer’s preferences are homothetic if and only if :
(x1, x2) > (y1, y2) <=> (tx1,tx2) > (ty1,ty2) for every t > 0.

Question 10

Quasilinear preferences

Answer 10

Quasilinear preferences lead to indifference curves that are parallel. If preferences are quasilinear, the demand for good 1 is independent of income.

Question 11

Giffen goods

Answer 11

The demand for Giffen goods decreases as the price decreases.

Question 12

reservation price.

Answer 12

At some price r1, the consumer will be indifferent between buying 1 unit of good 1 or not. This price is called the reservation price.

Question 13

when is a good a substitute?

Answer 13

If the demand for good 1 goes up when the price of good 2 goes up, good 1 is a substitute for good 2.
dx1/ dp2 > 0.

Question 14

when is a good a complement?

Answer 14

If the demand for good 1 goes down when the price of good 2 goes up, good 1 is a complement to good 2.
dx1/ dp2 < 0.

Question 15

inverse demand function

Answer 15

The inverse demand function is the demand function viewing price as a function of quantity demanded.

Question 16

Ordinary goods

Answer 16

The demand for ordinary goods increases as the price decreases.

For ordinary goods, an increase in the price leads to a decrease in demand:
dx1/dp1< 0.

Question 17

the p1-price offer curve

Answer 17

The curve containing all the utility-maximizing bundles traced out as p1 changes, with p2 and m constant,

Question 18

The demand curve for good 1

Answer 18

is a plot of the demand function x1(p1, p2, m),
holding p2 and m fixed at some predetermined values.

Question 19

Suppose that good 1 is a discrete good.

Answer 19

• If p1 is very high, the consumer will buy 0 units of good 1.
• At some price r1, the consumer will be indifferent between buying 1 unit of
  good 1 or not. This price is called the reservation price.
• If the price falls to r2, the consumer is willing to buy a second unit of good
  1.