Question

Section 2: SHORT ANSWER QUESTIONS 1. Does a change in consumers' tastes lead to a movement along the demand curve or a shift in 10 marks (5 marks each) the demand curve? Does a change in price lead to a movement along the demand curve or a shift in the demand curve?

Answer 1

1.

The demand for a good is the inverse relationship between price and quantity demanded. That is as the price of good rises consumer wants more of the good and vice verse. This implies a movement along the demand curve. The demand for good also depends on various factors such as price of a related good, money income of the consumer, the taste and preferences of the consumers, etc. As these factors changes, the demand curve shifts up or down accordingly. Because, in this case, the price of good remains unchanged but the quantity demanded either rises or falls. Then for each or any given price level the quantity demand changes and hence this implies a shift in the curve.

Therefore, the change in consumer taste leads to shifts in the demand curve and the change in the price of the good leads to movement along the same.

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2.

In competitive market, the firms take price as given. Then, at the market equilibrium P=MR=AR. Here as MR=$10, then AR=$10.

Now total revenue is

$TR=P\times Q$

The price of the good is P=MR=$10, then

$TR=10 Q$

Given that TR=$500,

$\therefore Q=\frac{TR}{10}=50$