Demand curve slope, Strategic Management

Why does the demand curve slope down?

Bridgette has an income of $480 which she uses to purchase only two goods:  CDs and mystery novels.  The price of a CD, PCD is $10, and the price of a mystery novel, PMN is $12.  Assume all indifference curves have the normal "bowed" shape.

a.   Draw Bridgette's budget constraint, putting mystery novels on the horizontal axis.  At her consumer optimum, she buys 30 CDs and 15 mystery novels.  Draw an indifference curve that leads to this choice.  What is her marginal rate of substitution (MRS) of CDs for mystery novels at this point?

b.   Now suppose that PCD rises to $15, PMN rises to $18, and Bridgette's income rises to $720.  How (if at all) will she adjust her consumption of CDs and mystery novels from part (a).

c.   Now return to the situation where PCD = $10, PMN = $12, and Income = $480.  For a membership fee of $120, Bridgette can join a discount shopping club and buy at the lower prices of PCD = $9 and PMN = $6.

Will Bridgette take this option?  Why or why not?  [Hint:  With the option, Bridgette's budget constraint will go through 30 CDs and 15 mystery novels, but it will not have the same slope as before.]

Posted Date: 2/25/2013 2:07:30 AM | Location : United States

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