Exercise Set 3
THE DEMAND CURVE

I. Objectives

1. To obtain the slope and intercepts of a demand curve
2. To see what causes a movement along the demand curve
3. To see what causes a demand curve to shift
4. To understand the parameters of the demand curve

II. Data

• Jay Leno's demand for coffee is given by P = a - bQ, where P is the price of a pound of coffee and Q is the quantity of coffee (in pounds) demanded by Leno.
• Select values for the parameters a and b. Both a and b should be positive. (Why?)
• Sketch the curve with P on the vertical axis. Indicate the intercepts and slope.
• Click on Gimme Demand! to confirm your results.
  
  

  a =

  b =

  Horizontal intercept =

  Vertical intercept =

  Slope =

III. Questions

1. Sketch Jay Leno's demand curve.
   1. Indicate the two intercepts and the slope.
   2. Explain how they are obtained.
2. Suppose the price of coffee is $20/lb. At this price, what is the quantity demanded by Leno?
3. Suppose the price of coffee falls from $20/lb to $16/lb.
   1. Ceteris paribus, how will Leno's quantity demanded change?
   2. Does the price change result in a movement along the curve or a shift of the curve? Explain.
4. Increase the value of a by 10%.
   1. Sketch the new demand curve, indicating its intercepts and slope.
   2. Has there been an increase in demand, or a fall in demand?
5. Which of the following is consistent with the increase in a? (Pick all correct answers.)
   1. Leno's income has risen.
   2. The price of tea has risen.
   3. The price of cream (a complement) has decreased.