1. Jenny\'s situation is given by the graph below. Use this graph to answer the

Question

1. Jenny's situation is given by the graph below. Use this graph to answer the following questions: Composite Good S 24 12 24 Good X a) What are three points on Jenny's Price-Consumption Curve (PCC)? b) What is the equation for the demand curve represented on the graph? Assume demand is linear. c) d) What is the price elasticity of demand at P-4? Is this commodity a normal or inferior good by all appearances? Show how you know by additional sketching on the graph (i.e. first re-produce this graph in your solution) If a second person had a demand curve identical to Jenny's and they both made up the total market, what would the market demand function be? e)

Explanation / Answer

1) The three points on Jenny's Price Consumption Curve are (1,8) (2,6) (3,4)

2) The equation for the demand curve is: P = 5 - .5Q

3) Equation:

(P/Q) (Inverse of the slope) = 4    

(4/2) (-1/.5) = 2 times - 2 = -4

4) It appears to be normal; however the income effect is very tiny thus a careful analysis is must to ensure that it is not inferior. The dotted line tangent to the lowest indifferent curve appears to be tangent at a point between 4 and 6 thus indicating that the good is normal in that range. From the reduction in price from 2 to 1 the income effect is not much clear. As long as the effects of substitution and income are measured properly the answer is secondary.

5) P = 5- 0.25Q; or Q = 10-2P

Doubling it will give the results Q = 20-4P.

In the form of a demand equation it will be P = 5-.25Q

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