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P. 1
Unit Answers

Unit Answers

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Unit 2 Answers to Practice Questions:Chapter 31. Explain what is meant by a purely competitive market.A purely competitive market is an institution or mechanism which bringstogether large numbers of independently acting buyers and sellers who want toexchange some standardized product. If the product is not standardized, thenthe market is not “purely competitive,” although it may be very competitive.Examples of purely competitive markets are a central grain exchange, a stock market or a market for foreign currencies where there are many buyers andsellers acting independently. [text: E p. 39; MA p. 39; MI p. 39]
 
2. Define “demand.”Demand is a schedule which shows the various amounts of a product buyersare willing and able to purchase at each price in a series of possible pricesduring a specified period of time. Demand portrays alternative price/quantitypossibilities which can be set down in a table. The key point to be recognized isthat demand is more than a statement of quantity purchased at a certainprice; it is a schedule of quantities which will be demanded at various prices,other things being equal, for a specified period of time. [text: E p. 40; MA p. 40;MI p. 40]
 
3. State the law of demand and explain why the other-things-equal assumption iscritical to it.
The law states that, other things being equal, as price increases, the corresponding quantity demandedfalls. Restated, there is an inverse relationship between price and quantity demanded with everything elseheld constant. The other-things-equal assumption refers to constant prices of related goods, income,tastes, and other things that affect demand besides price. The law of demand only looks at the relationship between price and quantity demanded. [text: E p. 40; MA p. 40; MI p. 40]4. Give three explanations for the law of demand:
 
First, it is explained by common sense. People tend to buy more of a product at a lower price than at ahigher price. Second, there is diminishing marginal utility: a decrease in satisfaction that results with anincrease in the amounts of a good or service. The second unit of a good yields less satisfaction (or utility)than the first. Third, there are income and substitution effects. With an income effect, a lower priceincreases the purchasing power of money income, enabling you to buy more at lower price. With asubstitution effect a lower price gives an incentive to substitute the lower-priced good for a now relativelyhigh-priced good. [text: E pp. 40-41; MA pp. 40-41; MI pp. 40-41]
5. Suppose the price of beef fell dramatically as the price of feed graindecreased. Use the income effect and the substitution effect to explain whythere was an increase in the quantity of beef purchased.The income effect predicts that the quantity of beef purchased will rise whenbeef prices fall because people will now be able to afford more. Thepurchasing power of their income rises when prices fall, assuming other thingsremain the same.The substitution effect predicts that the lower price of beef will lead consumersof substitute foods such as chicken and pork to buy more of the relatively lessexpensive beef and to buy less chicken or pork or other beef substitutes whoseprices have not fallen. [text: E pp. 40-41; MA pp. 40-41; MI pp. 40-41]
 
6. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. Ifthey are the only three buyers of CDs, complete the market demand schedulefor CDs. Graphically, is the market demand for a product the horizontal or vertical sum of the individual demand schedules?
 
Quantity demanded, CDs
 
Price Tom Dick Harry Total
 
$15 1 4 0 _____ 
 
13 3 5 1 _____ 
 
11 6 6 5 _____ 
 
9 10 7 10 _____ 
 
7 15 8 16 _____ 
 
 
 The market demand is the horizontal sum of the individual schedules.
 
Quantity demanded, CDs
 
Price Tom Dick Harry Total
 
$15 1 4 0 5
 
13 3 5 1 9
 
11 6 6 5 17
 
9 10 7 10 27
 
7 15 8 16 39
 
[text: E pp. 41-42; MA pp. 41-42; MI pp. 41-42]
 
7. List five basic determinants of market demand that could cause demand todecrease. (The text mentions seven possibilities.)(a) Consumers’ tastes become less favorable toward the item.
 
(b) The number of buyers decreases.
 
(c) Incomes fall and the item is a normal good.
 
(d) Incomes rise and the item is an inferior good.
 
(e) A decrease in the price of a substitute product.
 
(f) An increase in the price of a complementary product.
 
(g) Consumers expect lower prices in the future.[text: E pp. 43-44; MA pp. 43-44; MI pp. 43-44]
 
8. Differentiate between a normal (superior) and an inferior good.

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