Question of the day CR (LAW OF DEMAND): SOLUTION

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Which of the following best completes the passage below?

      The law of demand states that, if all other factors remain equal, the higher the price of a good,the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when_____________ .

•(A) Company A has a monopoly over the widget market so an increase in widget prices has little effect on the quantity demanded

•(B) a manufacturer of luxury cars noticed that its customer base is relatively  unresponsive to changes in price

•(C) a city experiences an increase in both gasoline prices and the number of  people taking public transportation

•(D) an increase in the number of computer retailers led to a decrease in the  average price of computers

•(E) a reduction in the price of oranges from $2 per pound to $1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds 

SOLUTION

SO we have to find the best option which illustrates the law of demand....ie higher the price of the good less is the demand.

lets look at the options one by one

a) OPTION A- monopoly is a situation where only one brand produces a certain product in a market...in such a situation weather the company chooses to increase or decrease the price does not have much bearing on its demand. customer does not have much option except to buy the same brand in same quantity. demand remains unaffected by price.not a good eg of law of demand.

b) OPTION B- similar would be the case with luxury cars.. generally the ultra rich go for buying such cars. even if there is some increase or decrease in the price it does not affect this segment. The demand again unresponsive to change in price.. not a good example

c)OPTION C- looks like a good one on initial reading.Higher the price of gasoline more is the no of ppl taking public transport ..This can imply that now less gasoline is being purchased as ppl switching from private vehicles to public transport. but alternatively one possibility can also be that the over all population of city has increased ( causing more ppl to take public transport),hence this option is open to many possibilities... so not a very strong example.

d)  OPTION D-no of retailers does not mean the no of computers sold. there might be 100 deals but the actual sale( demand) might still be zero..to relate price and no of retailers is not what we are supposed to do.

e) OPTION E- a perfect example of law of demand....without any ambiguity.

OPTION E is the answer

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