ECO600 Exercise sheet

ICMS

Week 2 Demand

Your name: Diwakar subedi

1. Which of these three options is false about diminishing marginal utility?

(a) The utility that a consumer gets from successive units of a product consumed over time falls
as the consumer consumes more and more of the product
(b) It causes total utility from consuming a product to decrease when more of it is consumed
(c)When we consume our second ice cream, the marginal increase in utility is bigger than when
we consume our tenth ice cream

2. What does the law of demand say? Is it always true?

3. Which of these is not a factor that causes shifts in the demand curve of a product?
(a) Future expectations
(b) Income levels
(c) Population size
(d) The price of inputs used to make the product

4. Draw demand curves for the underlined products to show what happens to their demand curve (does
it stay put, shift to the left or shift to the right) when:

(i) the price of vanilla beans rises because of a shortage of vanilla beans (recently, the price
of vanilla beans equalled the price of silver)
(ii) people expect the price of houses in Sydney will crash show with diagrams of demand
curves what happens to the demand curve
(iii) there is a reduction in the taxes that people have to pay and the amount of money they
spend on eating out at a restaurant
(iv) An entrepreneur creates a new smartphone called Cardphone that is flat like a credit
card and people who own Apple and Samsung phones begin to love this new phone

5. Name a product or service that has a highly inelastic demand, and another one that has a highly
elastic demand. Which one would have a price elasticity score, Ed, of more than 1? Which one would
have an Ed of less than 1?

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 ECO600 Exercise sheet
ICMS

6. State briefly what you understand about each of these ideas. Then write down what business
strategies you could apply using each concept to manipulate demand.

(a) ‘Diminishing marginal utility’ and reversing it (consider also otaa.com’s strategy:
tinyurl.com/otaadotcom)

(b) ‘Consumer surplus’ and manipulating it with price discrimination

(c) ‘The price elasticity of demand’: how to make your product more inelastic?

(d) The factors that cause shifts in the demand curve (see Question 4)

(e) ‘Advertising’: how would you design it?

(f) Thorstein Veblen’s ‘conspicuous consumption’: how to use it?

(g) Barry Schwartz’s ‘paradox of choice’: what should you do?

(h) ‘Planned obsolescence’: how can you use it?

(i) Tibor Scitovsky’s insights into comfort, pleasure from novelty and sources of long-lasting
novelty

(j) ‘Behavioural economics’: what tricks does it teach you?

7. Create a business plan for a new product or service. How would you design, price and market
the product or service by using the strategies you outlined above?