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Economics Question

Lordknukle
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9/28/2012 10:27:31 PM
Posted: 4 years ago
Assume a consumer finds that his total expenditure on compact discs stays the same after the price of compact discs declines . Which of the following is true for this price change?

aCompact discs are inferior goods to this consumer .
bThe consumer"s demand for compact discs increased in response to the price change
cThe consumer"s demand for compact discs is perfectly price elastic .
d The consumer"s demand for compact discs is perfectly price inelastic .
eThe consumer"s demand for compact discs is unit price elastic .

Isn't the answer d?
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Lordknukle
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9/28/2012 10:28:01 PM
Posted: 4 years ago
Cause the answer key says it's "E," which really doesn't make any sense.
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wiploc
Posts: 1,485
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9/28/2012 10:57:17 PM
Posted: 4 years ago
At 9/28/2012 10:27:31 PM, Lordknukle wrote:
aCompact discs are inferior goods to this consumer .
bThe consumer"s demand for compact discs increased in response to the price change

a and b are wrong.

cThe consumer"s demand for compact discs is perfectly price elastic .

Maybe. Nah, if I understand Wikipedia's chart, you don't want any if the price goes up a penny, and you want infinity if the price goes down a penny.

d The consumer"s demand for compact discs is perfectly price inelastic .

If the demand were inelastic, wouldn't he want the same number of CDs regardless of price? In which case, his expenditure would drop by half when the price dropped by half.

eThe consumer"s demand for compact discs is unit price elastic .

Wikipeda has something it calls, "Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand." This is the 45 degree angle, the border between slightly elastic and slightly inelastic. It doesn't call it "unit price elastic," but we are talking about a response to changes in price. Oh, I get it. "Unit" equals One. A 45 degree line has a rise over run of exactly one, or "unit."

And at that level of demand, cutting your price by half would exactly double your demand, so you would be spending the same amount of money.

But doesn't that mean that answer b was also right, even if less precise?

My guess is that b is wrong, because your demand hasn't increased unless your line moves. So in this case---regardless of what I said two paragraphs ago---it isn't the demand that shifted. Rather, your position on the demand line shifted.

Hope that helps.
Lordknukle
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9/28/2012 11:16:36 PM
Posted: 4 years ago
At 9/28/2012 10:57:17 PM, wiploc wrote:
d The consumer"s demand for compact discs is perfectly price inelastic .

If the demand were inelastic, wouldn't he want the same number of CDs regardless of price? In which case, his expenditure would drop by half when the price dropped by half.

Perfectly inelastic is just a straight line so that if price changes, quantity will stay exactly the same. This is what is happening in the example and yet it is wrong...

It can't be unit price elastic because quantity demanded is changing in response to price.
"Easy is the descent to Avernus, for the door to the Underworld lies upon both day and night. But to retrace your steps and return to the breezes above- that's the task, that's the toil."
Lordknukle
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9/28/2012 11:19:55 PM
Posted: 4 years ago
At 9/28/2012 11:16:36 PM, Lordknukle wrote:
At 9/28/2012 10:57:17 PM, wiploc wrote:
d The consumer"s demand for compact discs is perfectly price inelastic .

If the demand were inelastic, wouldn't he want the same number of CDs regardless of price? In which case, his expenditure would drop by half when the price dropped by half.

Perfectly inelastic is just a straight line so that if price changes, quantity will stay exactly the same. This is what is happening in the example and yet it is wrong...

It can't be unit price elastic because quantity demanded isn't changing in response to price.

Fixed.
"Easy is the descent to Avernus, for the door to the Underworld lies upon both day and night. But to retrace your steps and return to the breezes above- that's the task, that's the toil."
darkkermit
Posts: 11,204
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9/28/2012 11:35:15 PM
Posted: 4 years ago
do you know calculus by any chance? I'm coming up with a proof that it would be price elastic based on calculus.
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darkkermit
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9/28/2012 11:41:43 PM
Posted: 4 years ago
His consumption is P*Q = C. His consumption stays constant. If the price is decreasing, then the quantity is increasing to make sure that consumption remains constant. If unit elastic, the change in quantity matches the change in price so consumption remains the same.

I don't know how I can demonstrate that without proving it using calculus. Just has to be something you have to take as a given.
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wiploc
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9/29/2012 10:53:05 AM
Posted: 4 years ago
At 9/28/2012 11:19:55 PM, Lordknukle wrote:
At 9/28/2012 11:16:36 PM, Lordknukle wrote:
Perfectly inelastic is just a straight line so that if price changes, quantity will stay exactly the same. This is what is happening in the example and yet it is wrong...

If that were happening, then his expenditure would drop by half when the price dropped by half. He would buy the same number of CDs, but at half the price.

It can't be unit price elastic because quantity demanded isn't changing in response to price.

Fixed.

The price dropped by half, and he responded by buying twice as many. That's why his expenditure remains the same.
Lordknukle
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9/29/2012 10:55:27 AM
Posted: 4 years ago
At 9/29/2012 10:53:05 AM, wiploc wrote:
At 9/28/2012 11:19:55 PM, Lordknukle wrote:
At 9/28/2012 11:16:36 PM, Lordknukle wrote:
Perfectly inelastic is just a straight line so that if price changes, quantity will stay exactly the same. This is what is happening in the example and yet it is wrong...

If that were happening, then his expenditure would drop by half when the price dropped by half. He would buy the same number of CDs, but at half the price.

o.0. This helps. A lot. Thanks.
"Easy is the descent to Avernus, for the door to the Underworld lies upon both day and night. But to retrace your steps and return to the breezes above- that's the task, that's the toil."
Lordknukle
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9/29/2012 10:56:13 AM
Posted: 4 years ago
At 9/28/2012 11:41:43 PM, darkkermit wrote:
His consumption is P*Q = C. His consumption stays constant. If the price is decreasing, then the quantity is increasing to make sure that consumption remains constant. If unit elastic, the change in quantity matches the change in price so consumption remains the same.

I don't know how I can demonstrate that without proving it using calculus. Just has to be something you have to take as a given.

I see that I have been looking at it from the wrong viewpoint. Thanks.
"Easy is the descent to Avernus, for the door to the Underworld lies upon both day and night. But to retrace your steps and return to the breezes above- that's the task, that's the toil."
Stephen_Hawkins
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9/29/2012 11:36:15 AM
Posted: 4 years ago
wiploc hit the nail on the head. It's an awkward question in itself, though, anyway. Word of advice: always plot the graph first, as it makes things a lot clearer and these kinds of mistakes become nicer to handle.
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FREEDO
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9/30/2012 10:47:41 PM
Posted: 4 years ago
At 9/29/2012 10:56:13 AM, Lordknukle wrote:
I see that I have been looking at it from the wrong viewpoint. Thanks.

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