Question

2. The following is a demand schedule for cheeseburgers for an individual.
PRICE OF
CHEESEBURGERS QUANTITY DEMANDED
5.00 0
4.50 1
4.00 2
3.50 3
3.00 4
2.50 5
2.00 6
1.50 7
1.00 8
0.50 9
a. Plot the demand curve for cheeseburgers, with price on the Y-axis, and quantity
demanded per week on the X-axis.
b. Assume the individual has a fixed budget of £24 per week to spend on burgers,
and the current price of cheeseburgers and chicken burgers is £3.00, and that a
consumer buys 4 of each type of burger. Now assume that the price of
cheeseburgers falls to £2. Using the concept of the ‘income’ and ‘substitution’
effect, explain why the demand for cheeseburgers rises to 6.
c. Assuming chicken and cheeseburgers are perfect substitutes, and income is fixed
at £24, what is likely to happen to the demand for chicken burgers (to the
nearest burger) if the price of cheeseburgers rises to £4.00?

Answer 1

a.

b.

$$I=24$$

$$p_1=3, q_1=4,$$

$$p_2=3, q_2=4$$

Really

$$p_1\times q_1+p_2\times q_2=I$$

If $p_2^/=2$ then we will have

$$q_2^/=\frac {I-p_1q_1}{p_2^/}$$

$$q_2^/=6$$

c.

If $p_2^/=4$ then

$$q_2^/=\frac {I-p_1q_1}{p_2^/}$$

$$q_2^/=3$$