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

Chapter Three: Demand 81 CHAPTER THREE ANSWERS 1. When we have a fixed budget (which we all do), this implies that any choice necessarily comes at the cost of something else. We can’t have everything; therefore we must consider which choice will give us the most benefit, or as economists say, the most marginal utility. 2. As you increase the consumption of any good, the additional increment to your utility (the marginal utility) falls since we satisfy our most urgent needs first. Therefore, while additional units of a good give us smaller and smaller increases in utility, the money could have been spent on alternative goods that also offer increases in marginal utility. So we must consider the opportunity cost of our purchases of additional quantities of one good, and compare against the gains in utility from consumption of our next best alternative, the opportunity cost. Because of diminishing marginal utility, we require a lower price to consume more of a good. 3. An increase in the price of baseball gloves will change the relative price of baseball gloves in terms of footballs. The demand for footballs will increase. 4. A. Demand (income effect) B. Demand (tastes and preferences) C. Quantity Demanded (price effect) D. Demand (Price of related goods) 5. Hamburger helper in this example is an inferior good, and chicken would be a luxury good. 6. The demand curve will shift outward (up and right) to reflect the desire to buy more goods now before prices rise. 7. False. Just because most people would ignore such a price rise, the marginal buyers of salt will have a reason to adjust their purchases based on the higher price. It is the marginal buyer we are concerned with. 8. The incremental change of a variable with the next unit. 9. False. While there is no “Mr. or Ms. Market,” the market curve sums up individual curves such that it also reflects diminishing marginal utility. 10. No. Demand curves would have to be horizontal, which would mean there was no diminishing marginal utility. 11. The responsiveness of a variable to change. In this chapter, we were concerned about the elasticity of demand, or how responsive the quantity demanded is to a change in price. 12. A. Elastic (time) B. Elastic (more substitutes) C. Elastic (% of income spent has risen (since income has fallen))