Question

 The following graph shows the demand curve for sedans (for example, Toyota Camrys or Honda Accords) in New York City. For simplicity, assume that all sedans are identical and sell for the same price. Initially, the graph shows market demand under the following circumstances: Average household income is $50,000 per year, the price of a gallon of regular unleaded gas is $4 per gallon, and the price of a subway ride is $2.00.

 Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

 Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

 Consider the graph. Suppose that the price of a sedan decreased from $20,000 to $15,000. This would cause a _______ the demand curve.

 An increase in average income causes a rightward _______  the demand curve; therefore, you may conclude that sedans are _______  good. (Hint: Try substituting different values for Average Income in the graph input tool and observing what happens.)

 Suppose that the price of a gallon of gas rises from $4.00 to $5.00. Because sedans and gasoline are _______ , an increase in the price of a gallon of gas shifts the demand curve for sedans to the _______ .

Answer 1

1. Decrease in price of sedan would cause a movement along the demand curve.
(Decrease in price of a good causes a movement along the demand curve.)

2. Increase in average income causes a shift of the demand curve, so sedans are normal good.
(Increase in income, increases the demand so it is a normal good.)

3. Because sedans and gasoline are complements, an increase in the price of a gallon of gas shifts the demand curve for sedans to the left.
(Sedans and gasoline are consumed together so they are complements. Increase in price of gas decreases its demand and thereby decreases the demand for sedans.)