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Practice each question, then open the answer or worked solution.
If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?
The bundle (10, 8) contains more quantities of both products. Therefore, if a consumer has monotonic preferences, they would prefer the bundle (10, 8) over the bundle (8, 6). So, the consumer cannot be indifferent between the two bundles.
Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
If the consumer’s preferences are monotonic, the bundles can be ranked as follows:
Rank 1 – (10, 10)
Rank 2 – (10, 9)
Rank 3 – (9, 9)
Bundle (10, 10) will always have a higher preference for the monotonic consumer.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
No, the preferences of the friend are not monotonic. If the friend had a monotonic preference, they would not be indifferent to the bundles (5, 6) and (6, 6). Since the bundle (6, 6) has more quantities of both goods, they would naturally prefer it over the other bundle.
Suppose there are two consumers in the market for a good and their demand functions are as follows:
d1 (p) = 20 − p for any price less than or equal to 20 and d1 (p) = 0 at any price greater than 20.
d2 (p) = 30 − 2p for any price less than or equal to 15 and d1 (p) = 0 at any price greater than 15.
Find out the market demand function.
According to the question,
Suppose there are 20 consumers for a good and they have identical demand functions:
D (p) = 10 − 3p for any price less than or equal to and d1 (p) = 0 at any price greater than.
What is the market demand function?
Solution coming soon.
Consider a market where there are just two consumers and suppose their demands for the good are given as follows:
Calculate the market demand for the goods.
| p | d1 | d2 |
| 1
2 3 4 5 6 |
9
8 7 6 5 4 |
24
20 18 16 14 12 |
The market demand can be calculated as follows
What do you mean by a normal good?
A normal good is a good for which the demand increases with an increase in the consumer’s income or wages. For example, let’s consider a fruit like an apple. When the consumer’s income increases, the demand for apples also increases.
What do you mean by an ‘inferior good’? Give some examples.
Inferior goods are goods for which the demand decreases with an increase in the consumer’s income. For example, consider goods like cheap cigarettes, low-cost furniture and inexpensive fast food items. There are always better alternatives to these products, which are priced higher. So, when the consumer’s affordability increases, the need for inferior goods decreases.
What do you mean by substitutes? Give examples of two goods which are substitutes of each other.
Substitutes are goods of the same category which can be used interchangeably to some extent. For example, let us consider the products tea and coffee. Both of these products fall under the same classification of hot beverages, fulfil similar needs and are also similarly priced. Hence, a consumer will shift to coffee if the price of tea increases and vice versa.
What do you mean by complements? Give examples of two goods which are complements of each other.
Complements are goods which are usually consumed together and complement each other. An example would be tea and sugar or printers and cartridges. The prices of complementary goods also affect each other’s demand. For example, if the price of sugar goes up, it is likely that the demand for tea will decrease significantly.