Question

Discussion: Answer each section below in separate paragraphs.

A. Among the following products, set forth which ones will likely face a more elastic demand, and which ones will likely face a more inelastic demand, and explain why for each product.

1. Toothpaste
2. Big Mac Hamburger
3. Aspirin
4. Gasoline

B. If a person was required to take insulin to maintain a basic quality of life, the demand for this drug would be very inelastic. If the price for insulin increased drastically by many hundred or perhaps even thousands of dollars, would the demand remain inelastic? Why or why not?

C1. Explain how total utility and marginal utility change as you eat the same food repeatedly during one sitting until you can eat no more.

C2. Set forth two examples from your own life that can serve as exceptions to the principle of diminishing marginal utility. Explain why you believe they are exceptions.

Answer 1

A.

The goods can be classified on the basis of elasticity as below:

Aspirin (most inelastic as it is a necessity)

Toothpaste (inelastic as it is a basic need)

Gasoline (elastic due to availability of substitutes)

Big Mac Hamburger (Highly elastic because of too many close substitutes present)

B.

If the price of insulin increased drastically too much, the demand for it would still remain inelastic, however the magnitude of inelasticity would fall.

This is because insulin is a necessity for sugar patients and cannot be abandoned even if the price increases. However, with too much increase in price, people and doctors would start looking for alternative options.

C1.

Eating food repeatedly in one sitting will first increase TU, then it reaches a maximum when the person starts feeling full and then starts to decline as eating more would deteriorate health of the consumer and he might throw up from overeating.

This means MU will first be positive, then become zero and even negative.

C2.

The principle of diminishing MU states as consumption of a good increases, its MU is first positive, then starts to fall to zero and eventually becomes negative.

The two exceptions for me are: income and reading books

This is because more money income and reading more books will always give me joy and pleasure and not harm me.