Author Question: If price changes by one firm induce rival firms selling close substitutes to alter their prices, ... (Read 31 times)

shenderson6 · **on:** Jun 29, 2018

If price changes by one firm induce rival firms selling close substitutes to alter their prices,

A) firms will be able to raise their prices without fear of losing sales.
B) the demand curve will shift in response to a change in price.
C) the original firm faces an elastic demand curve.
D) the original firm faces an inelastic demand curve.
E) there is no competition between the rival firms.

Question 2

Consider two individuals, Wendy and Jenny, who discount delayed utilities with a weight of 1/4 and 7/8, respectively. Consuming one hamburger gives both Wendy and Jenny benefits worth 16 utils instantly and has delayed costs of 20 utils.

a) If the nearby hamburger shop is closed for a week, comment on whether both individuals will consume hamburgers after a week.
b) If a new shop is opened nearby, and hamburgers are available for consumption today, comment on whether both individuals will consume hamburgers.

IAPPLET · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

a) If the consumption of hamburgers is delayed by a week, both the benefit and the cost the individuals receive from consumption will have to be discounted.
Wendy's net benefit from consuming a hamburger after a week = 1/4(16 - 20 ) = -1. Therefore, Wendy will not want to consumer a hamburger after a week.
Jenny's net benefit from consuming a hamburger after a week = 7/8(16 -20 ) = -3.5. Therefore, Jenny will not want to consume a hamburger after a week.

b) Net benefit that Wendy will derive by consuming a hamburger today = 16 - 1/4(20 ) = 11 utils. Because the net benefit is positive, Wendy will want to consume a hamburger from the new shop today.
The net benefit that Jenny will derive by consuming a hamburger today = 16 - 7/8(20 ) = -1.5 utils. Because the net benefit is negative, Jenny will not want to consume a hamburger from the new shop today.