No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Three: Demand 79 CHAPTER THREE: QUESTIONS FOR REVIEW 1. Describe how our individual budget constraint (how much income you have, say, per month) relates to opportunity cost and your demand for an individual good or service. 2. Why is the concept of opportunity cost inseparable from the Law of Demand? 3. Describe a situation (i.e., make an example) of where a change in the price of any item changes a relative price and causes a change in demand. 4. Do the following represent factors that change demand , or change quantity demanded ? a. Your boss gives you a raise. b. You wear a new outfit of a particular style and the person you really like gives you very positive feedback. c. The price of an iPhone goes down, so you buy one. d. Government Motors raised prices on new cars by 10%, so you decide to buy a Honda (this question is asking about demand of Hondas, not the GM). 5. When your boss gives you a raise, you decide to stop buying hamburger helper and start buying chicken. What can you say about these goods? 6. Draw a demand curve, with correct labeling of the axes. Now, assume that you just learned that “helicopter” Ben Bernanke (who prints the money in the U.S.) plans to double the money supply in the U.S. to “stimulate” the economy. Even though we haven’t reviewed the money chapter yet, you know this can’t be good and expect prices to rise when he goes on his printing binge. What will happen to the demand curve based on your change in expectations ? The hint is the bold word! 7. True or False. Since the price of salt is a very small part of a person’s budget, one can absorb a price increase (say a doubling of the price) without seemingly even knowing the price went up. That means that when the price doubles, the quantity demanded will not change. Explain your rationale. 8. Explain what economists mean when they talk about a “marginal” decision. 9. True or False. While individual demand curves must slope down (because of diminishing marginal utility), the market demand curve does not have to slope down. 10. Is it possible to have a consumer surplus of zero for all consumers? If that is possible, what would have to be true about demand?