Question

1. Why does the market for toothbrushes have more inelastic demand and the market for automobileshave more elastic demand?

2. The following are the demand curves for the two consumers that make up the market for automobiles.

​(a) P = 60 - 10Q

(b) P = 60 - 15Q

What is the market demand curve for the automobiles? Show the market demand in equation and graphical form . (remember that before adding together the demand curves, to express the market demand equation with Quantity as the dependent variable and price as the independent variable).

If the price in the market is $12, then what will be the quantity of automobiles demanded? If the dealerships selling autos want to increase total revenues, should they raise or lower the price from P = $12? In answering this last question, please start by determining the point elasticity of demand at P = $12.

3. Assume that a consumer price index for all items in the U.S. is based on a specific basket of goods in the initial (base year), and that the mix of goods does not change from year to year (i.e. same amounts and brands of food items, electronic goods, housing sizes, etc), though the quality of some of the goods in the basket increases over time. Using concepts from Chapter 5, explain why the price changes measured by the index will overstate the actual increase in the cost of living.

Answer 1

1).

A market is said to be elastic if the percentage change in quantity demanded is more than the percentage change in price and it is said to be inelastic if the percentage change in quantity demanded is less than the percentage change in price.

Now, the tooth brush is a necessity good, => if the price of tooth brush increases then consumer will reduce the quantity demanded slightly that is percentage change in quantity demanded is less than the percentage change in price, => market for tooth brush is more inelastic.

On the other hand auto mobility is relatively non-necessity because auto mobile having many substitutes. If the price increases the consumer will reduce the quantity demanded substantially that is percentage change in quantity demanded is more than the percentage change in price, => market for auto mobile is more elastic.