Universidad Carlos III de Madrid – Department of Economics

Principles of Economics -Problem Set 2

Conceptual Questions

1. What are the main features of a competitive market?

2. How would you define the demand curve and what is the Law of Demand?

3. What is the difference between a movement along the demand curve and a shift of the
demand curve?

4. Explain with the help of a graph the difference between change of demand and
change of quantity demanded.

5. What causes a demand curve to shift?

Problems

6. Draw a demand curve for music downloads. What happens to this demand in each
of the following scenarios? Why?

a. The price of iPods falls

b. The price of music downloads falls
c. The price of CDs falls

7. Helen and Ken are the only two people in the world who drink orange juice for
breakfast. For each price of a cup of orange juice their quantities demanded are
indicated in the table below. Draw the demand for orange juice by Helen and by Ken
and the demand for orange juice in the world market.

Quantity of
Price of a cup Helen’s quantity Ken’s quantity orange juice
of orange juice of orange juice of orange juice demanded in
(Euros) demanded demanded the whole
7 0 0 world
6 2 1
5 4 2
4 6 3
3 8 4
2 10 5
1 12 6
0 14 7

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8. Using the information provided in the previous problem, can you obtain the algebraic
expression of Helen’s and Ken’s demand for orange juice? How do you interpret that
they respond differently to changes in the price? What is the inverse of the demand
function? Why do we put price on the vertical axis to represent the demand curve? Does
it make any difference to have quantity in the left hand side of the equation and the
price on the right hand side as compared to the other way around?

Other Questions

1. Does a change in the taste of the consumers generate a movement along the demand
curve or a shift of the demand curve? Does a change in the price generate a movement
along the demand curve or a shift of the demand curve?

2. The income of Popeye declines and for this reason he buys less spinach. Is the
spinach an inferior or a normal good? What happened to the Popeye's demand curve of
spinach?

3. Explain each of the following statements:

a. When good weather starts in Boston, the hotel prices in the Caribbean go down.
b. When the gasoline price increases, more people commute by train.

4. Consider the market of minivans and identify the determinants of the demand of such
good, to determine whether the demand increases or decreases in each of the following
scenarios:
a. People decide to have more babies.
b. The price of “station wagons” goes up.
c. The stock-market crashes and the wealth of people decreases.

5. During the 90s technological advance reduced the price of both chips and computers.
How does it affect the market of computers? How does it affect the market of software?
And what can we say about the price of the typing machines?

6. Suppose that in year 2005 the number of births is unusually high. How does this baby
boom affect the salary of baby care professionals in 2010? And what is your prediction
in this respect for 2020? (Hint: A baby younger than 5 years needs care whereas a 15
years old boy or girl can provide care to younger brothers or sisters).