Economics

Mid-Term Exam Paper

Chapter 4 & 5 Demand

|February 20, 2010 |

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1. Assume that you and several classmates each receive a $300 credit voucher (good for today only) from Sears Online. Go to http://www.sears.ca/ and select $300 worth of merchandise. Use Add to Basket to keep a running total. Print your final selections. Compare your list with your classmates' lists. What explains the differences? Would you have purchased your items if you had received $300 in cash to be spent whenever and wherever you pleased?

Differences between the way you spend $300 and your friends spend $300 derive from your unique preferences over possible items to purchase. You may wish to purchase a lawnmower while your friend may wish to purchase clothing.

     If you had been given cash instead of a credit note, it is unlikely you would have spent all the money at Sears. You would probably have shopped at your favourite stores or perhaps have spent the money on concert tickets or restaurant meals.

2. Generally, the elasticity of demand for a product will be greater (a) the larger the number of substitutes, (b) the greater the proportion of income an item takes, and (c) the less the item is considered to be a necessity. Canadian Tire, at its website, http://www.canadiantire.ca, posts a weekly specials on selected merchandise. It must conclude that the demand for these specials is elastic: The decrease in price will increase total...