read each scenario and explain how it represents either the law of demand, the substitution effect, or the…
read each scenario and explain how it represents either the law of demand, the substitution effect, or the income effect. be sure to be specific in your explanations.\n1. pretend you go to target after school. you need a new pair of shoes and look in the shoe department. you see that they are selling the same shoes you saw at the shoe dept. for $10 less. why would demand for the shoes at target go up? (think of the law of demand)\n2. last tuesday at the choir concert, principal johnson told the ticket - sellers to lower the price by $3.00 for all the tickets. that resulted in the tickets being sold out. how does that example demonstrate the income effect?\n3. deandre has always bought bounty paper towels. however, yesterday he went to walmart and saw that they went up in price from $3.00 to $5.99. he decided to buy the store brand paper towels instead. how does this demonstrate the substitution effect?\n4. mary works at mcdonalds and has finally gotten the 6th month raise she has been waiting for. now at lunch she buys 2 cookies instead of just one. how does this demonstrate the income effect?
Answer
Brief Explanations:
- The law of demand states that, ceteris paribus (all else being equal), as the price of a good decreases, the quantity demanded increases. At Target, the price of the shoes is lower than at The Shoe Dept. So, according to the law of demand, the quantity demanded of the shoes at Target will go up because consumers are more willing to buy at a lower price.
- The income - effect occurs when a change in the price of a good affects the consumer's purchasing power. When the price of choir concert tickets was lowered by $3, consumers' real income (purchasing power) increased. They could afford to buy more tickets with the same amount of money, which led to the tickets being sold out. This shows that the decrease in price increased the quantity demanded due to the increase in purchasing power.
- The substitution effect is when a consumer switches to a substitute good in response to a change in the relative prices of goods. DeAndre always bought Bounty paper towels, but when the price at Walmart increased from $3 to $5.99, he decided to buy the store - brand paper towels instead. Since the store - brand became a more attractive option relative to Bounty due to the price change, he substituted Bounty with the store - brand.
- Mary got a raise, which means her income increased. With the increase in income, she has more purchasing power. At lunch, she can now afford to buy 2 cookies instead of 1. This is an example of the income effect, where an increase in income leads to an increase in the quantity demanded of a good.
Answer:
- The demand for the shoes at Target goes up because of the law of demand. When the price is lower at Target compared to The Shoe Dept., according to the law of demand (price and quantity demanded are inversely related, ceteris paribus), the quantity demanded at Target increases.
- When the price of choir concert tickets was lowered, consumers' purchasing power increased. This increase in real income (the income - effect) led to more people being able to afford the tickets, resulting in them being sold out.
- DeAndre substituted Bounty paper towels with the store - brand because the price of Bounty increased. The substitution effect occurs when a consumer switches to a substitute good due to a change in relative prices.
- Mary's raise increased her income. With more income, she has more purchasing power and can buy more cookies. This is an example of the income effect.