Question

Variables typically included in a multivariate demand function (other than the price and quantity of the item the demand function represents) are consumer tastes and preferences, the number of buyers, spendable (disposable) income, prices of substitute goods, prices of complementary goods, advertising expenditures, weather, and expectations. Recalling that the price of the item being considered is placed on the vertical axis, and the quantity on the horizontal axis, the other variables are termed demand shifters. Please answer the following questions about the affect changes in other variables might have on the demand for the item. These changes will either cause demand to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.

1. The price of gasoline is going up, up ….. As a result the demand for large gas-gulping vehicles should:

The demand for gasoline would fall. The demand curve will shift leftwards. Complements are jointly used. The cross elasticity is negative. If the price of one good increases, the demand for the complement will fall.

2.    If the amount spent on advertising a good increases, then the demand for the good being advertised              will likely:

3.    Consumers have a strong and growing preference for smart cell-phones. As a result, the demand for POTS                   (Plain Old Telephone Service) may be expected to __________________.

4.    Weather is a variable that can affect demand. As the temperature decreases over the winter months,            the demand for hot coffee drinks should ___________and for iced drinks should ___________.

5.   As the cost of commuting increases, university administrators can expect the demand for on-line courses to __________________.

Answer 1

Ans) 1) As gasoline and vehicles are complementary goods, when price of gasoline goes up, demand for vehicles decreases. Demand curve will shift to the left and both price and quantity will decrease.

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2) When spending on advertisements increases, the popularity of the product increases. As a result, demand for the product increases. Demand curve will shift to the right. And both price and quantity will increase.

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3) In winters, demand for hot beverages like hot coffee increases and demand curve will shift to the right.

Whereas demand for cold beverages like iced drinks will decrease and demand curve will shift to the left.

It is because, to keep oneself warm, one prefers hot beverages which raises body temperature.

4) As commuting costs increase, cost of attending offline class will also increase. In response to this, more people will prefer online courses to cut the expenses.

Demand for online courses will increase and demand curve will shift to the right.