Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong
University of Finance. - 75 - Chapter 4 CONSUMER DEMAND QUESTIONS
& ANSWERS
Q4.1"Theutilityderivedfromconsumptionisintangibleandunobservable.Therefore,
the utility concept has no practical value.@Discuss this statement.
Q4.1ANSWER
Theutilityderivedfromconsumptionisintangible,andthereforeunobservable.However,
measurable influence on their purchase decisions.Through their
revealed preferences, consumers convey their evaluation of the
value, or worth, of individual
products.Whilethevaluederivedthroughconsumptionisintangible,itleadsto
purchase decisions that can be monitored and responded to by firms.
Q4.2Isanincreaseintotalutilityorsatisfactionfollowinganincreaseinincome
inconsistent with the law of diminishing marginal utility?
Q4.2ANSWER
No,thelawofdiminishingmarginalutilitystatesthatthemarginalutilityderived
from consumption will eventually diminish as consumption increases
during a given
timeperiod.Thismeansthattheadditiontototalutilityperdollarofincomewill
tendtofallastotalincomerises.Despitethefactthattotalutility,orwell-being,
tends torise with income, it istypical that the marginal utility
derivedper dollar of
incometendstofallasincomerises--asispredictedbythelawofdiminishing
marginal utility. Q4.3Prospective car buyers are sometimes
confronted by sales representatives who argue
thattheycanofferavehiclethatisAjustasgoodasaBMW,butatone-halfthe
price.@Usetheindifferenceconcepttoexplainwhytheclaimsofthesales
representative are not credible. Q4.3ANSWER
Iftwoproductsprovidethesameamountofsatisfactionorutility,theconsumeris
said to display indifference between the two.Indifference implies
equivalence in the
eyesoftheconsumer.Aconsumercanbeindifferentbetweengoodsandservices
Chapter 4 Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 76 -
thataredistinctinaphysicalormaterialsense.Similarly,aconsumercandisplay
distinctly different preferences for goods and services that are
similar in a physical or
materialsense.What=simportantinthecaseofconsumerindifferenceisthattwo
products yield the same amount of satisfaction or well-being to the
consumer. This should make consumers skeptical of sales
representative who argue that a
cheaperproductisAjustasgoodas@amoreexpensivecompetitor.Firstofall,
cheapersubstitutesseldomperformatthesamehighlevelascompetingproducts
with a deservedly superior reputation.And second, it is important
to remember that when consumers buy a product, they purchase a
whole range of attributes associated
withthatproduct.Forexample,theBMW760ifour-doorsedanisa$125,000
vehiclefamousamongcarbuffsforitsawesomepower,comfort,andstyling.BuyersofaBMW760ifour-doorsedannotonlyenjoythecreaturecomfortsofa
fine automobile, some also enjoy the Asnob appeal@of owning a rare
and exclusive
automobilethattellsallonlookersthattheyaresuccessful.WhileyouandImight
think Asnob appeal@is silly, some consumers have a different
opinion, and who are we to argue with consumer preferences?
Q4.4Following a price change for Diet Coke, explain how retailers
use sales information to learn if Doritos snack chips represent a
complement or substitute for Diet Coke. Q4.4ANSWER
Followingapricechange,companiesusesalesinformationtodistinguish
complements from substitutes by noting the size and direction of
effects on demand
forrelatedproducts.Demandcurvesaredownwardsloping.Asaresult,whenthe
price of a product is decreased, sales of that product rise.At the
same time, sales of
substitutesfallascustomersswitchtothenowlower-pricedalternative.Whenthe
price of a product rises, sales of that product fall but sales of
substitute products rise
ascustomersswitchtothesubstitute=srelativebargainprice.Thereisapositive
correlation between price changes and units sold when two products
are
substitutes.Salesofsubstituteschangeinthesamedirectionofthepricechangeforsubstitute
products. Conversely, when the price of a product is decreased,
sales of that product and complements both rise.When the price of a
product rises, sales of that product fall
asdosalesofcomplementaryproducts.Thereisaninversecorrelationbetween
price changes and units sold when two products are complements.
Q4.5Describe the income, substitution, and total effects on
consumption following a price decrease. Consumer Demand Presented
by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 77 - Q4.5ANSWER
Thetotaleffectonconsumptionfollowingapricedecreaseconsistsofincomeand
substitutioneffects.First,consumerswilltendtosubstitutethenowrelativelyless
expensiveproductsforitssubstitutes.Thisinvolvesamovementalongagiven
indifferencecurvetoamarketbasketconsistingofalessexpensivecombinationof
goods and services that provide the same utility and is called the
substitution effect.In addition, a decrease in the price of a
product means that a given budget will allow a greater total amount
of goods and services to be purchased for consumption.As a result,
a price decrease has a secondary effect similar to a inccrease in
income.
Q4.6During the past 40 years the average price of a new
single-family home has risen by a factor of ten, making the cost of
housing prohibitive for many Americans.Over the same time frame,
however, the number of units sold per year has more than
doubled.Arethesedatainconsistentwiththeideaofadownward-slopingdemandcurvefor
new housing? Q4.6ANSWER
No,thesedataareconsistentwithadownward-slopingdemandcurvefornew
housing.Formostgoodsandservices,thepricechargedisthemostimportant
determinant of sales.Quantity demanded falls with a price increase,
and rises with a price decrease.In the case of housing, the
quantity demanded would have fallen as
pricesroseexceptfortheoverwhelminginfluenceofrisingincomesovertime.Housingisanormalgood.Housingdemandrisessharplyduringeconomic
expansionsandcontractsduringrecessions.Overlongperiodsoftime,housing
demand rises slowly and steadily as economic growth raises
disposable income.It is
vitalthatstudentsseparateoutpriceandincomeeffectswhenconsideringthe
demand for housing and other products.
Q4.7Whatwouldanupward-slopingdemandcurveimplyaboutthemarginalutility
derived from consumption?Why aren't upward sloping demand curves
observed in the real world? Q4.7ANSWER
Thelawofdiminishingmarginalutilitystatesthatthemarginalutilityderivedwill
fallastheconsumptionofagivenproductincreasesduringagiventimeinterval.This
gives rise to a downward sloping demand curve for all goods and
services.For
agivendemandcurvetobeupwardsloping,anincreasingmarginalutilityof
Chapter 4 Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 78 - consumption would have to
be operative.This is counter to human nature.Despite
mythsthatsometimesariseconcerningthepricingofsomeluxurygoods,like
perfume, there is no real-world evidence of upward sloping demand
curves. In this regard, it is worth emphasizing the fact that an
upward sloping demand
curveimpliesthathigherpricesleadtoanincreaseinquantitydemanded.Under
such a wonderful circumstance, firms would have an incentive to
charge higher and
higherprices(Atoinfinityandbeyond!@).Nothingwouldlimitthefirmsabilityto
gain revenues by raising prices.In the real world, higher prices
eventually result in some buyers being priced out of the market and
to an eventual downturn in revenues. Q4.8How is a price-consumption
curve related to a demand curve? Q4.8ANSWER If income and the
prices of other goods and services are held constant, a reduction
in theprice of
agivenconsumptionitemcausesconsumerstochoosedifferentmarket
baskets.Thevariousmarketbasketsthatmaximizeutilityatdifferentpricesfora
givenitemtraceouttheconsumer=sprice-consumptioncurve.Forexample,the
price-consumptioncurveshowshowtheoptimalconsumptionofbothgoodsand
servicesareaffectedbychangingpricesforservices.Asimilarprice-consumption
curvecouldbeusedtoillustratehowtheoptimalconsumptionofbothgoodsand
servicesareaffectedbychangingpricesforgoods.Ontheotherhand,thedemand
curve for services shows how the quantity demanded ofservices rises
in a response to a fall in the price for services.A similar
individual demand curve could be used to illustrate how the
quantity demanded ofgoodsrises inaresponsetoafallinprices for
goods.
Q4.9Individualconsumerdemanddeclinesforinferiorgoodsaspersonalincome
increasesbecauseconsumersreplacethemwithmoredesirablealternatives.Isan
inverse relation between demand and national income likely for such
products? Q4.9ANSWER
No,notusually.Theoretically,itisplausiblethattheaggregatedemandforsome
goodsandservicesmightbecounter-cyclical,actuallyrisingduringabusiness
recessionandfallingduringaneconomicboom.Afterall,ifindividualconsumers
shift from hamburger to steak as incomes rise, wouldn't it seem
reasonable to expect hamburger demand to rise with a fall in
income?The answer seems to be yes and no. Yes, as incomes rise,
demand from high-income individuals declines for
Ainferior@goodslikehamburger,busrides,andbluejeansastheseconsumersswitchtomore
Consumer Demand Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 79 -
desirablesubstitutessuchasporterhousesteak,automobiles,anddesignerclothing.However,asincomesrise,otherlow-incomeconsumersmoveuptheeconomic
ladder.Perhaps for the first time, they are now able to afford
hamburger, bus rides, and blue jeans.As a result, economy wide
demand for so-called inferior goods may actually rise as income
levels increase, albeit at a much slower pace than demand for
other, more desirable products.
Despitealackofempiricalevidence,thepossibilityofaninverserelation
betweenaggregateproductdemandandincomehasintriguedeconomistsfora
numberofyears.Thisinterestwasoriginallycreatedbyananomalycalledthe
Apotatoparadox.@Aslegendhasit,aVictorianeconomistnamedRobertGiffen
discoveredthatthepotatocropfailureof1845sodepressedIrishincomesthatthe
poorhadtoactuallyincreasetheirconsumptionofthenowhigher-pricedpotatoes.Because
they had to spend so much on potatoes, a necessary staple, the poor
couldn't
affordmeatorothersubstitutesandbecameevenmoredependentthanbeforeon
potatoes.Thus,potatoesbecameknownastheclassiccaseoftheinferioror,
AGiffen,@good.However, empirical evidence casts serious doubt on
the credibility
ofsuchachainofevents.Afterstudyingthehistoricalrecord,economistsGerald
Dwyer and Cotton Lindsay found little support for the notion that
the consumption of
potatoesinIrelandincreasedduringthisperiod.Sowidespreadweretheeffectsof
thefungusPhytophthorainfestansthatitdestroyedroughlyone-halfofthe1845
potato crop in Ireland after inflicting serious damage in America,
in England, and on
theContinent.AfterSeptember1846anduntilharvesttimeinAugustofthe
following year, few potatoes could be bought at any price.Without
imports and with
adecreaseindomesticsupply,howcouldpotatoconsumptionbythepoorpossibly
have risen during
theIrishpotatofamine?Moreover,thereisnoevidencethatlow potato
prices during good years had a depressing effect on potato
consumption by the poor, as would be necessary to classify potatoes
as an inferior good.Therefore, it is
onlyreasonabletoconcludethattheincreaseinpotatopricesandthedecreasein
incomecausedbytheIrishpotatofamineresultedinadeclineintheaggregate
consumptionofpotatoes.Asistypicalforgoodsingeneral,apositiverelation
betweenpotatodemandandeconomywideincomeseemstohold.Despitethe
legendofthepotatoparadox,concreteevidenceofaninverserelationbetween
aggregate demand and income remains elusive.
(See:GeraldP.Dwyer,Jr.andCottonM.Lindsay,ARobertGiffenandthe Irish
Potato,@American Economic Review, March 1984, 188-192.)
Q4.10ThroughoutmuchoftheUnitedStates,high-wageworkersshunpublictransitand
drive their cars to work.At the same time, these same high-income
individuals often support massive subsidies for public transit.Use
the concept of revealed preference Chapter 4 Presented by Suong
Jian & Liu Yan, MGMT Panel , Guangdong University of Finance. -
80 -
toexplainthepublicdemandfortransportation.Canyouexplainthissomewhat
confusing consumer behavior by high-income individuals? Q4.10ANSWER
High-wage workers often shun public transit and drive their cars to
work.This stems
fromthefactthattimeintransitisacompellingconsiderationforsuchworkers.Getting
where they need to go, and getting there on time, matter much more
than the
out-of-pocketcostsassociatedwithdrivingtowork.Forexample,KobeBryant=s
timeisvaluable,andhedrivestowork.Histimeismuchtoovaluabletobespent
waiting for the bus. At the same time, it is fascinating to note
the almost universal political support
forsubsidizedmasstransitamonghigh-incomeindividuals.Whilehigh-income
individualshaveadocumentedrevealedpreferencefordrivingtowork,theyprefer
thatothers,includingthelessfortunate,takepublictransit.Thismakeseconomic
sense from the standpoint that subsidized mass transit might reduce
road and parking
congestion,andtherebymakedrivingtoworkeasierforhigh-incomeindividuals.these
same high-income individuals often support massive subsidies for
public transit.
Ontheotherhand,itislessobviouswhyhigh-incomeindividualsmightsupport
woefully underutilized mass transit.Perhaps they view support for
such mass transit
asatypeofincometransfertothepoorandotherbeneficiariesofmasstransit
(government employees, equipment manufacturers, and so on).
SELF-TEST PROBLEMS & SOLUTIONS STP4.1Budget Allocation.Consider
the following data: Goods (G) Services (S) Units Total Utility
Units Total Utility 0 0 0 0 1 150 1 100 2 275 2 190 3 375 3 270 4
450 4 340 5 500 5 400 Consumer Demand Presented by Suong Jian &
Liu Yan, MGMT Panel , Guangdong University of Finance. - 81 -
A.Construct a table showing the marginal utility derived from the
consumption of
goodsandservices.Alsoshowthetrendinmarginalutilityperdollarspent
(the MU/P ratio) if PG = $25 and PS = $20.
B.Ifconsumptionofthreeunitsofgoodsisoptimal,whatlevelofservices
consumption could also be justified?
C.Ifconsumptionoffiveunitsofservicesisoptimal,whatlevelofgoods
consumption could also be justified? D.Calculate the optimal
allocation of a $150 budget.Explain. STP4.1SOLUTION A. GOODS (G)
SERVICES (S) Units Total Utility Marginal Utility MU/PG = MU/$25
Units Total Utility Marginal Utility MU/PS = MU/$20 0 0 -- -- 0 0
-- -- 1 150 150 6.00 1 100 100 5.00 2 275 125 5.00 2 190 90 4.50 3
375 100 4.00 3 270 80 4.00 4 450 75 3.00 4 340 70 3.50 5 500 50
2.00 5 400 60 3.00
B.S=3.When3unitsofgoodsarepurchased,thelastunitconsumedgenerates100
utils of satisfaction at a rate of 4 utils per dollar.Consumption
of 3 units of services
couldalsobejustifiedonthegroundsthatconsumptionatthatlevelwouldalso
generate 4 utils per dollar spent on services. C.G = 4.When 5 units
of services are purchased, the last unit consumed generated 60
utilsofsatisfactionatarateof3utilsperdollar.Consumptionof4unitsofgoods
could be justified on the grounds that consumption at that level
would also generate 3 utils per dollar spent on goods. Chapter 4
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong
University of Finance. - 82 -
D.G=3andS=3.75.Theoptimalallocationofa$100budgetinvolvesspending
accordingtothehighestmarginalutilitygeneratedperdollarofexpenditure.First,
one unit of goods would be purchased since it results in 6 utils
per dollar spent.Then, one units of services and another unit of
goods would be purchased, each yielding 5 utils per dollar.Then , a
third unit of both goods and services would be purchased, thus
yielding 4 utils per dollar.With thee units of goods and three
units of services, a total of $75 dollars will have been spent on
goods and $60 on services.This totals $135 in expenditures, and
leaves $15 unspent from a $150.budget.Assuming that
partialunitscanbeconsumed,$15isenoughtobuyanadditional0.75unitsof
services. STP4.2Individual Demand Curve.Alex P. Keaton is an ardent
baseball fan.The following table shows the relation between the
number of gamesheattends per month during the season and the total
utility he derives from baseball game consumption: Number of
Baseball Games per Month Total Utility 0 0 1 50 2 90 3 120 4 140 5
150
A.ConstructatableshowingKeaton'smarginalutilityderivedfrombaseball
game consumption. B.At an average ticket price of $25, Keaton can
justify attending only one game per month.Calculate Keaton=s cost
per unit of marginal utility derived from baseball game consumption
at this activity level. C.If the cost/marginal utility trade-off
found in part B represents the most Keaton is willing to pay for
baseball game consumption, calculate the prices at which he would
attend two, three, four, and five games per month. D.Plot Keaton's
baseball game demand curve. Consumer Demand Presented by Suong Jian
& Liu Yan, MGMT Panel , Guangdong University of Finance. - 83 -
STP4.2SOLUTION A. Number of Baseball Games Per Month Total Utility
Marginal Utility 0 0 -- 1 50 50 2 90 40 3 120 30 4 140 20 5 150 10
B.At one baseball game per month, MU = 50.Thus, at a $25 price per
baseball game,
thecostperunitofmarginalutilityderivedfrombaseballgameconsumptionis
P/MU = $25/50 = $0.50 or 504 per util. C.At a maximum acceptable
price of 504 per util, Keaton's maximum acceptable price for
baseball game tickets varies according to the following schedule:
Number of Games Per Month Total Utility Marginal Utility MU = U/G
Maximum Acceptable price at 504 per MU 0 0 -- -- 1 50 50 $25.00 2
90 40 20.00 3 120 30 15.00 4 140 20 10.00 5 150 10 5.00 D.Keaton's
baseball ticket demand curve is: Chapter 4 Presented by Suong Jian
& Liu Yan, MGMT Panel , Guangdong University of Finance. - 84 -
PROBLEMS & SOLUTIONS
P4.1A.MarginalUtility.Completethefollowingtable,whichdescribesthedemand
for services: Price Units Total Utility Marginal Utility
Price/Marginal Utility $80 0 0 --- --- 75 1 100 70 2 180 65 3 240
60 4 280 55 5 300
B.Howdoesanincreaseinconsumptionaffectmarginalutilityandthe
price/marginal utility ratio? C.What is the optimal level of
services consumption if the marginal utility derived from the
consumption of goods costs $1 per util? Consumer Demand Presented
by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 85 - 4.1SOLUTION A. Price Total Units Total Utility
Marginal Utility Price/Marginal Utility $75 1 100 100 $0.75 70 2
180 80 0.875 65 3 240 60 1.08 60 4 280 40 1.50 55 5 300 20 2.75
B.Themarginalutilityderivedfromgoodsconsumptionfallsasthenumberofunits
consumedincreases.Thisfollowsfromthelawofdiminishingmarginalutility.Indeed,marginalutilityisfallingsorapidlythattheP/MUratioincreasesasthe
numberofunitsconsumedexpands.Despitefallingprices,themarginalcostof
utility derived from services consumption is rising.
C.S=2unitsofservicesshouldbepurchasedifthemarginalcostofutilityderived
from the consumption of services is $1 per util.The first unit of
services consumed involves a cost of 754 per util.The second unit
of services consumed involves a cost of 804 per util.Both represent
relative bargains. However, a third unitof services would involve a
price-utility tradeoff of $1.08 per util.At a marginal cost of $1
per util, services consumption would represent the better bargain.
P4.2Utility Theory. Determine whether each of the following
statements is true or false.Explain why. A.According to the theory
of consumer behavior, more is always better. B.Consumer must
understand how much one product is preferred over another in order
to rank-order consumption alternatives.
C.Amarketbasketisadescriptivestatementthatrelatessatisfactionor
well-being to the consumption of goods and services. Chapter 4
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong
University of Finance. - 86 - D.The nonsatiation principle
abstracts from time and place considerations.
E.Marginalutilitymeasurestheconsumer'soveralllevelofsatisfactionderived
from consumption activities P4.2SOLUTION
A.True.ConsumerbehaviortheoryrestsupontheAmoreisbetter@assumption
regarding the utility tied to consumption.All goods and services
are desirable in the
senseofbeingabletosatisfyconsumerwants.Asaresult,consumerswillalways
prefer more to less of any good or service.
B.False.Theconsumer=sunderstandingofordinalutilitymakespossiblearank
orderingofpreferredgoodsandservices.Noticethatknowledgeconcerning
completeconsumerpreferencesdoesnotnecessarilyincludeunderstandingabout
how much one product is preferred over another.
C.False.Autilityfunctionisadescriptivestatementthatrelatessatisfactionor
well-being to the consumption of goods and services.
D.True.Atanyspecificplaceandtime,consumersdobecomesated.Therefore,the
nonsatiationprincipleinvolvesacertainamountofabstractionfromtimeandplace
considerations.It is best considered within the context of money
income where more money brings additional satisfaction or
well-being.
E.False.Whereastotalutilitymeasurestheconsumer'soveralllevelofsatisfaction
derived from consumption activities, marginal utility measures the
added satisfaction
derivedfromaone-unitincreaseinconsumptionofaparticulargoodorservice,
holding consumption of other goods and services constant.
P4.3LawofDiminishingMarginalUtility.Indicatewhethereachofthefollowing
statements is true or false.Explain why.
A.Thelawofdiminishingmarginalutilitystatesthatasanindividualincreases
consumptionofagivenproductwithinasetperiodoftime,theutilitygained
from consumption eventually declines. Consumer Demand Presented by
Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 87 - B.When prices are held constant, a diminishing
marginal utility for consumption decreases the cost of each
marginal unit of satisfaction.
C.Marginalutilitymeasurestheaddedsatisfactionderivedfromaone-unit
increaseinconsumption,holdingconsumptionofothergoodsandservices
constant.
D.Whengoodsarerelativelyscarce,thelawofdiminishingmarginalutility
means that the added value of another unit of goods will be small
in relation to the added value of another unit of services.
E.Thelawofdiminishingmarginalutilitygivesrisetoadownward-sloping
demand curve for all goods and services. P4.3SOLUTION A.False.In
general, the law of diminishing marginal utility states that as an
individual
increasesconsumptionofagivenproductwithinasetperiodoftime,themarginal
utility gained from consumption eventually declines. B.False.When
prices are held constant, a diminishing marginal utility for
consumption increases the cost of each marginal unit of
satisfaction.
C.True.Whereastotalutilitymeasurestheconsumer'soveralllevelofsatisfaction
derived from consumption activities, marginal utility measures the
added satisfaction
derivedfromaone-unitincreaseinconsumptionofaparticulargoodorservice,
holding consumption of other goods and services constant.
D.False.Whengoodsarerelativelyscarce,thelawofdiminishingmarginalutility
meansthattheaddedvalueofanotherunitofgoodswillbelargeinrelationtothe
added value of another unit of services.
E.True.Thislawgivesrisetoadownward-slopingdemandcurveforallgoodsand
services. P4.4Indifference Curves.Suggest briefly whether each of
the following statements about indifference curves that show
preferences between goods and services is true or false and defend
your answer. Chapter 4 Presented by Suong Jian & Liu Yan, MGMT
Panel , Guangdong University of Finance. - 88 -
A.Consumerspreferhigherindifferencecurvesthatrepresentgreater
combinations of goods and services to lower indifference curves
that represent smaller combinations of goods and services.
B.Indifferencecurvesslopedownwardbecauseifthequantityofoneconsumer
product is reduced, the quantity of the other must also decrease to
maintain the same degree of utility.
C.Theslopeofanindifferencecurveshowstherateatwhichconsumersare
willing to tradeoff goods and services.
D.ThefactthatindifferencecurvesdonotintersectstemsfromtheAmoreis
better@ principle.
E.Indifferencecurvesbendinward(areconcavetotheorigin)becauseifgoods
are relatively abundant, the added value of another unit of goods
will be small in relation to the added value of another unit of
services. P4.4SOLUTION A.True.Consumers prefer more to less, so
they prefer higher indifference curves that
representgreatercombinationsofgoodsandservicestolowerindifferencecurves
that represent smaller combinations of goods and services.
B.False.Indifference curves slope downward.This stems from the fact
that the slope
ofanindifferencecurveshowsthetradeoffinvolvedbetweengoodsandservices.Becauseconsumerslikebothgoodsandservices,ifthequantityofoneisreduced,
the quantity of the other must increase to maintain the same degree
of utility. .
C.True.Theslopeofanindifferencecurveshowstherateatwhichconsumersare
willingtotradeoffgoodsandservices.Forexample,whengoodsarerelatively
scarce, the law of diminishing marginal utility means that the
added value of another unit of goods will be large in relation to
the added value of another unit of
services.Conversely,whengoodsarerelativelyabundant,theaddedvalueofanotherunitof
goods will be small in relation to the added value of another unit
of services. D.True.Indifference curves do not intersect.Holding
goods constant, an indifference
curveinvolvingagreateramountofservicesmustgivegreatersatisfaction.Similarly,holdingservicesconstant,anindifferencecurveinvolvingagreater
amount of goods must give greater satisfaction.This stems from the
fact that goods Consumer Demand Presented by Suong Jian & Liu
Yan, MGMT Panel , Guangdong University of Finance. - 89 -
andservicesbothprovideconsumerbenefits,andreflectstheAmoreisbetter@principle.
E.True.Indifferencecurvesbendinward(areconcavetotheorigin).Forexample,
when goods are relatively scarce, the law of diminishing marginal
utility means that the added value of another unit of goods will be
large in relation to the added value
ofanotherunitofservices.Conversely,whengoodsarerelativelyabundant,the
added value of another unit of goods will be small in relation to
the added value of another unit of services.
P4.5BudgetConstraints.Holdingallelseequal,indicatehoweachofthefollowing
changeswouldaffectabudgetconstraintthatlimitsconsumptionofgoods(Y)and
services (X).Explain your answer. A.Deflation that uniformly drops
the price of all goods and services. B.Inflation that consistently
increases the price of all goods and services.
C.Technicalchangethatreducesthepriceofgoods,butleavesthepriceof
services unchanged. D.Economic growth that boosts the level of
disposable income. E.Government-mandatedhealth care coverage for
workersthatbooststheprice of goods by 3% and increases the price of
services by 5%. P4.5SOLUTION A.Deflation that drops the price of
all goods and services results in a parallel rightward
(outward)shiftinthebudgetconstraint.Holdingincomeconstant,lowerprices
make
itpossibleforconsumerstobuymoregoodsandserviceswiththesametotal
amountofspending.Thisbeneficialimpactonconsumptionissimilartothat
following an increase in income.
B.Inflationthatincreasesthepriceofallgoodsandservicesresultsinaparallel
leftward(inward)shiftinthebudgetconstraint.Holdingincomeconstant,higher
prices reduce the amount of goods and services that consumers can
buy with a fixed
amountofspending.Thisharmfulimpactonconsumptionissimilartothat
following a decrease in income. Chapter 4 Presented by Suong Jian
& Liu Yan, MGMT Panel , Guangdong University of Finance. - 90 -
C.Technicalchangethatreducesthepriceofgoods,butleavesthepriceofservices
unchangedresultsinanoutwardrotationofthebudgetconstraintalongthegoods(Y)
axis.After such a change, the budget line intersects the Y axis at
a higher point,
indicatingthatagreateramountofgoodscanbepurchasedwithafixedbudget.Theamountofservicesthatcanbepurchasedforafixedamountisunaffectedby
suchachange,andtheXintercept(servicesaxis)ofthebudgetconstraintis
unaffected by such a change.
D.Economicgrowththatbooststhelevelofdisposableincomeresultsinaparallel
rightward (outward) shift in the budget constraint.Holding prices
constant, growing
incomemakesitpossibleforconsumerstobuymoregoodsandserviceswiththe
same total amount of spending.This beneficial impact on consumption
is similar to that following deflation that drops the price of all
goods and services.
E.Government-mandatedhealthcarecoverageforworkersthatbooststhepriceof
goods by 3% and increases the price of services by 5% will have a
negative impact on consumption of both goods and services, but the
negative impact will be worse in the case of services.Following
such a change, the relative price of services will rise relative to
the price of goods.The new budget line will move inward 3% along
the
Xaxisreflectingthefactthatafixedbudgetwillonlybeabletobuy97%ofthe
previously affordable goods.The new budget line will move inward 5%
along the Y
axisreflectingthefactthatafixedbudgetwillonlybeabletobuy95%ofthe
previouslyaffordableservices.Theneteffectissimilartoadecreaseinincome
followed by a unilateral increase in the price of services.
P4.6Budget Allocation.Consider the following data: Goods (G)
Services (S) Units Total Utility Units Total Utility 0 0 0 0 1 100
1 70 2 160 2 124 3 210 3 175 4 250 4 220 Consumer Demand Presented
by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 91 - 52755250 A.Constructa table showing
themarginalutilityderivedfromtheconsumption of goods and
services.Also show the trend in marginal utility per dollar spent
(the MU/P ratio) if PG = $20 and PS = $15.
B.Ifconsumptionoftwounitsofgoodsisoptimal,whatlevelofservices
consumption could also be justified?
C.Ifconsumptionoffiveunitsofservicesisoptimal,whatlevelofgoods
consumption could also be justified? D.Calculate and explain the
optimal allocation of a $100 budget. P4.6SOLUTION A. GOODS (G)
SERVICES (S) Units Total Utility Marginal Utility MU/PG = MU/$20
Units Total Utility Marginal Utility MU/PS = MU/$15 0 0 -- -- 0 0
-- -- 1 100 100 5.00 1 70 70 4.67 2 160 60 3.00 2 124 54 3.60 3 210
50 2.50 3 175 51 3.40 4 250 40 2.00 4 220 45 3.00 5 275 25 1.25 5
250 30 2.00
B.S=4.When2unitsofgoodsarepurchased,thelastunitconsumedgenerates60
utils of satisfaction at a rate of 3 utils per dollar.Consumption
of 4 units of services could be justified on the grounds that
consumption at that level would also generate 3 utils per dollar
spent on services. C.G = 4.When 5 units of services are purchased,
the last unit consumed generated 30 utils of satisfaction at a rate
of 2 utils per dollar.Consumption of 4 units of goods could be
justified on the grounds that consumption at that level would also
generate 3 utils per dollar spent on goods. Chapter 4 Presented by
Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 92 -
D.G=2andS=4.Theoptimalallocationofa$100budgetinvolvesspending
according to the highest marginal utility generated per dollar of
expenditure.First,
oneunitofgoodswouldbepurchasedsinceitresultsin5utilsperdollarspent.Then,
three units of services would be purchased.Finally, single
additional units of goods and services would be purchased.In total,
$40 dollars would be spent on two units of goods, and $60 dollars
would be spent on four units of services.
P4.7IndividualDemand.Indicatewhethereachofthefollowingstatementsistrueor
false and support your response.
A.Anindividualdemandcurveshowstherelationbetweenpriceandquantity
demanded, or shifts in demand from one demand curve to another.
B.Theincome-consumptioncurveshowsmovementsalongademandcurveas
income changes.
C.Fallingservicepricescauseincreasesinthedemandforservices,anda
reduction in the quantity demanded of goods. D.The various market
baskets that maximize utility at different prices for a given item
trace out the consumer=s price-consumption curve.
E.Inthecaseofinferiorgoods,income-consumptioncurvesandEnglecurves
have a negative slope. P4.7SOLUTION
A.False.Anindividualdemandcurveshowstherelationbetweenpriceandquantity
demanded, or movement along the demand curve.
B.False.Theincome-consumptioncurveshowsshiftsindemandfromonedemand
curve to another as income changes. C.False.Falling service prices
cause increases in the quantity demanded of services, and a
reduction in demand for goods.
D.True.Thevariousmarketbasketsthatmaximizeutilityatdifferentpricesfora
given item trace out the consumer=s price-consumption curve.
Consumer Demand Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 93 -
E.True.Inthecaseofinferiorgoods,income-consumptioncurvesandEnglecurves
have a negative slope.
P4.8IndividualDemandCurve.CatherineWillowslivesonaremoteranchnear
BozemanMontana,andisanaviddownhillskierattheBigSkyskiresortduring
wintermonths.Liftticketsareexpensive,however,andWillowsmustwatchher
budgetcarefully.Lastseason,adailyliftticketcost$48andWillowsskiedtwo
days per week.Using a 100-unit base for the amount of satisfaction
(utility) gained from skiing one day per week, Willows estimates
that the added value gained from skiing declines according to the
following schedule: Number of Ski Days per Week Marginal Utility 0
0 1 100 2 80 3 60 4 40 5 20 A.If the cost/marginal utility
trade-off displayed last season represents the most
Willowsiswillingtopayforadailyliftticket,calculatethepricesatwhich
she would be willing to ski one, two, three, four, and five days
per week. B.Plot Willows= daily lift ticket demand curve.
P4.8SOLUTION A.Last season, a daily lift ticket cost $48 and
Willows skied two days per week. With MU = 80 for skiing two days
per week, the implicit cost was 604per util (= $48/80).
Atamaximumacceptablepriceof604perutil,Willows'maximumacceptable
price varies according to the following schedule: Number of days
spent skiing Marginal Utility MU = U/G Maximum Acceptable price at
604 per MU Chapter 4 Presented by Suong Jian & Liu Yan, MGMT
Panel , Guangdong University of Finance. - 94 - per week 0 -- -- 1
100 $60.00 2 80 48.00 3 60 36.00 4 40 24.00 5 20 12.00
D.Willows=lift ticket demand curve is:
P4.9ConsumerSurplus.TheHeritageClubatHarbourTownofferselegant
accommodationsfordiscriminatingvacationersonHiltonHeadIsland,South
Carolina. A full list of ocean sports, a swimming pool, golf
courses, tennis courts, an open-air hot tub, and a complete
activities program are available.The resort is located in Sea Pines
Plantation, with many activities just a few minutes away. More
than15milesoftrailsforjoggingandbikingwindthroughouttheplantation.
Specialty shopping and harbor-front dining are within walking
distance. Consumer Demand Presented by Suong Jian & Liu Yan,
MGMT Panel , Guangdong University of Finance. - 95 -
Likemanyvacationresorts,HeritageClubhasdiscoveredtheadvantagesof
[email protected]
illustrate,assumethatanindividualvacationer=sweeklydemandandmarginal
revenue curves can be written: P=$6,500 - $1,250Q, MR= TR/Q =
$6,500 - $2,500Q, where P is the price of a single week of vacation
time, and Q is the number of weeks
ofvacationtimepurchasedduringagivenyear.Forsimplicity,assumethatthe
resort=s marginal cost for
aweekofvacationtimeis$1,500,andthatfixedcosts are nil.This gives
the following total and marginal cost relations: TC=$1,500Q,
MC=TC/Q = $1,500.
A.Calculatetheprofit-maximizingprice,output,profitlevel,andconsumer
surplus assuming a per unit price is charged each customer.
B.Calculate the profit-maximizing price, output and profit level
assuming a two-part pricing strategy is adopted for each customer.
C.Now assume that fixed costs of $4 million per year are incurred,
and that 500
time-sharecustomers(Aowners@)areattractedwhenanoptimaltwo-part
pricing strategy is adopted.Calculate total annual profits.
P4.9SOLUTION A.If a single per unit price is charged, the
profit-maximizing price is found by setting MR = MC, where MR=MC
$6,500 - $2,500Q=$1,500 2,500Q=5,000 Q=2Chapter 4 Presented by
Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 96 -
Attheprofit-maximizingquantityof2,theoptimalsingleunitpriceis$4,000and
total profits equal $5,000 per customer because: P=$6,500 -
$1,250(2) =$4,000 =TR - TC =$4,000(2) - $1,500(2) =$5,000 per
customer
Thevalueofconsumersurplusatastandardperunitpriceisequaltotheregion
underthedemandcurvethatliesabovetheprofit-maximizingpriceof$4,000.Because
the area of such a triangle is one-half the value of the base times
the height, the value of consumer surplus equals: Consumer
Surplus=2 [2 ($6,500 - $4,000)] =$2,500 per customer
Inwords,thismeansthatatasingleperunitpriceof$4,000perweek,atypical
individualwouldchoosetouse2weeksofvacationtimeattheresort,resultingin
totalrevenuesof$8,000andtotalprofitsof$5,000percustomerfortheresort
facility.Thefactthatconsumersurplusequals$2,500meansthatthetypical
vacationer would have been willing to pay an additional $2,500 for
these two weeks
ofvacationtime.Thisisanamountaboveandbeyondthe$8,000paid.The
customer received a real bargain.
B.Asanalternativetochargingasingle-unitpriceof$4,000perweek,considerthe
profits that could be earned using a two-part pricing scheme.To
maximize profits, the resort would choose to charge a per-unit
price that equals marginal cost, plus a fixed fee equal to the
amount of consumer surplus received by each consumer at this
price.Remember,thevalueofconsumersurplusisequaltotheregionunderthe
demand curve that lies above the per-unit price.When the per-unit
price is set equal to marginal cost, P = $1,500 and Q = 4 because
P=MC Consumer Demand Presented by Suong Jian & Liu Yan, MGMT
Panel , Guangdong University of Finance. - 97 - $6,500 - $1,250Q=
$1,500 Q=4 P= $6,500 - $1,250(4) = $1,500 At the per unit price of
$1,500 and output level of 4, the value of consumer surplus equals:
Consumer Surplus=2 [4 ($6,500 - $1,500)] =$10,000 per customer
Thus, $10,000 is the maximum time-share or annual membership fee
that the typical
vacationerwouldpaytospend4weeksattheresortwhenamodestadditional
Ause@chargeof$1,500perweekwaspaidforeachweekspentattheresort.It
followsthattheprofit-maximizingtwo-partpricingschemeistochargeanannual
time-shareormembershipfeeof$10,000peryearplusweeklyfeesof$1,500per
week.Resortrevenuesof$16,000[=$10,000+(4$1,500)]percustomer
representthefullvaluederivedfromatypicalcustomerstaying4weeksperyear,
cover marginal costs of $6,000 (= 4 $1,500 ), and result in a
$10,000 (= $16,000 - $6,000)profit contribution per customer for
the resort.
C.AsshowninpartB,theprofit-maximizingtwo-partpricingschemeistocharge
each customer an annual time-share (or membership)fee of$10,000 per
year plus Ause fees@of $1,500 per week.If fixed costs are present,
the $10,000 amount per customer represents profit contribution
before fixed costs rather than net profit. If the number of paying
time-share subscribers is 500 per year, and fixed costs total $4
million per year, then total net profits equal: =Total revenue -
Marginal cost - Fixed cost =500 [$10,000 + $1,500(4)] - 500
[$1,500(4)] - $4,000,000 =$1 million per year Chapter 4 Presented
by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of
Finance. - 98 -
Itisinterestingtonotethattime-sharesandannualmembershipsaresoprofitable
thatsuchmarketingarrangementshavelargelyreplacedpay-as-you-goresortsat
many popular vacation destinations. P4.10Revealed Preference.On
weekends during the summer months, Terry rents jetskis
atthebeachonanhourlybasis.Lastweek,Terryrentedhisjetskisfor20hours
per day at a rate of $50 per hour.This week, rentals fell to 15
hours per day when Terry raised the price to $55 per hour.
Usingthesetwoprice-outputcombinations,therelevantlineardemandand
marginal revenue curves can be estimated as: P = $70 - $1Q and MR =
$70 - $2Q A.Set MR = 0 and solve for Q to calculate the
revenue-maximizing price-output combination and profit level.How
much are these maximum revenues? B.If marginal cost is $30 per
hour, calculate the profit-maximizing price-output
combination.Alsocalculaterevenuesandprofitsatthisprofit-maximizing
activity level. (Remember MR = MC at the profit-maximizing activity
level.) P4.10SOLUTION A.To find the revenue-maximizing price-output
rental rate, set MR = 0, and solve for Q.Because TR=P Q =($70 -
$1Q)Q =$70Q - $1Q2 MR=TR/Q MR=$70 - $2Q = 0 2Q=70 Q=35 At Q = 35,
Consumer Demand Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 99 - P=$70 - $1(35) =$35 =TR -
TC = $70Q - $1Q2 - $30Q = $70(35) - $1(352) - $30(35) =$175 per day
Total revenue at a price of $35 is: TR=P Q =$35 35 =$1,225 per day
(Note:2TR/Q2 35 hours.) B.To find the profit-maximizing output
level analytically, set MR = MC, or set M = 0, and solve for
Q.Because MR=MC $70 - $2Q=$30 2Q=40 Q=20 At Q = 20, P=$70 - $1(20)
=$50 Chapter 4 Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 100 - Total revenue at a price
of $50 is: TR=P Q =$50 20 =$1,000 per day =TR - TC = $70Q - $1Q2 -
$30Q = $70(20) - $1(202) - $30(20) =$400 per day (Note:2/Q2 < 0,
This is a profit maximum because total profit is falling for Q >
20.) CASE STUDY FOR CHAPTER 4 Why is Tracking Consumer Demand so
Tough? Driven by movements in stock prices, the ratio of household
wealth to personal income climbed dramatically in the late-1990s,
peaked in early 2000, and then retreated considerably over the
nexttwoyears.1
Economictheorytellsusthatincreasesinconsumerwealthtendtoraise
householdspending;decreasesinwealthtendtolowerhouseholdspending.ThisAwealth
effect@usuallyproducesanegativecorrelationbetweenhouseholdwealthandthepersonal
savingrate,definedasthedifferencebetweenincomeandspending.Empiricalresearch
suggest that an additional dollar of wealth leads to a permanent
rise in the level of household consumption of about two to five
cents, with the adjustment occurring gradually over a period of one
to
threeyears.Suchestimatesofthewealtheffectexplainedthebehaviorofconsumer
demand and personal saving during the second half of the1990s
fairly well. Assumingthat a
dollarofadditionalwealthleadstoanincreaseinconsumptionofthreecents,onewould
1
Foradiscussionofthewealtheffectandhowitmakestrackingchangesinconsumer
demanddifficult,seetheEconomicReportofthePresident(2004),88-102.
(http://www.gpoaccess.gov/eop/) Consumer Demand Presented by Suong
Jian & Liu Yan, MGMT Panel , Guangdong University of Finance. -
101 -
predictthattheenormousriseinwealthduringthelate1990swouldhavecausedthesaving
rate to decline by about 4 percentage points.It did.However, the
expected wealth effect failed
tomaterializefollowingthestockmarketcrashof2000-02.Basedonexperience,thestock
marketcrashshouldhavecausedasharpdropinconsumerdemandandareboundinthe
personal saving rate of more than 2 percentage points. In fact, the
personal saving rate has not risen materially (see Figure 4.13).
Figure 4.13 here
Economistsstilldon=tknowwhyconsumerdemandhasbeensostrong,andsavings
ratessoweak,atthestartofthenewmillennium.Thegovernment=srecentfailureto
accurately predict wealth effects tied to the stock market crash of
2000-02 adds to a long list of problems encountered in measuring
and predicting changes in consumer demand.To illustrate, consider a
simple but very tough to answer question: How much have consumer
prices risen or fallen lately?When prices rise, there is the
hard-to-decipher problem of sorting out payments
forqualityimprovementsversussimplyhigherprices.Thinkabouthowmuchmoreyouare
paying for monthly long-distance telephone service and you=ll see
what economists mean when they complain about adjusting for quality
improvements.Chances are that your monthly long-distance bill is
higher today than it was five years ago, but your use of telephone
services has changed dramatically over time. Fifteen years ago,
commercial and personal use of FAX services skyrocketed as lawyers
and business people sent clients and suppliers documents via
FAX.While FAX services may be
moreexpensivethantraditionalAsnailmail,@howdoesonevaluethebenefitsachievedin
terms of more timely service?Over the next few years, use of
telecommunications networks to
sendinformationovertheInternetisboundtosoar.Whenmeasuringpricechangesfor
householdtelecommunicationsservices,howdoesoneadjustInternetserviceprovider(ISP)
charges for the value added by faster and more reliable
service?Using high-speed broadband,
itbecomespossibletosendandreceivevideoclipsandmovierentals.Illegalfilesharingof
musicdownloadsalsobecomesquickandeasy.Howdoyoumeasurethequality,priceand
valueoftheselegalandillegalservices?Whentelephoneserviceisdeliveredbytraditional
cabletelevisioncompanies,howdoyouadjusttheamountofyourphonebillfortheadded
benefitofApayperview@movies,ortheaddedconvenienceofhavingphoneandcablebills
combined?Evenmeasuringthecostoftraditionalvoicetelephoneservicebecomesdifficult
when local and long-distance services are combined and offered fora
fixedcharge per month
byasingleprovider,astheywillbeintheyearsahead.Everyyear,voicephoneservice
customersmakemorefrequentandlongerphoneconversations.Themonthlybillpaidby
consumers continues to rise, but the cost per minute has fallen
precipitously for decades.Is the cost of voice telephone service
going up or down?
Howaboutthecostofapersonalcomputer?Whiletheaveragepricepaidby
consumersforadesktopPChasfallenfromroughly$3,000tounder$1,000duringthelast
decade,computercostsfellevenfasterthanyouthink.Dramaticimprovementsincomputing
powerandeaseofusemakescomparingcomputerhardwareandsoftwarepricesovertime
Chapter 4 Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 102 -
difficult,atbest.Thefactisthatyourdesktopcomputerisseveraltimesmorepowerfuland
easier to use than a room full of computers in the 1970s.
Problemsjudgingthepaceofproductivitygrowthandpricechangesfortelephone
serviceandpersonalcomputersareonlytwoexamplesofthemanydifficultiesconfrontedby
government statisticians.The basic problem is that admittedly
imperfect government-provided estimates increasingly involve errors
and bias.Government statisticians are slow to recognize the effects
of new technology and better products.Efforts to reduce the burden
of paperwork on business have also made it more difficult to gather
detailed data in a timely fashion.With help from leading
manufacturers, the BLS revised its methods for calculating computer
price indexes by taking into account increases in computing
speed.As a result, computer prices adjusted for quality changes are
plungingata double-digit rateperyear.Inmostotherareas,thetaskof
adjustingpriceindexesforchangesinproductqualityiswoefullyinadequate.These
measurementproblemsarecompoundedbythefactthattherapidlyexpandingservicesector
has created almost all of the economy's new jobs, and productivity
measurement in services is treacherously difficult.Without accurate
measures of product quality and worker productivity, tracking
changes in consumer demand and consumer prices is impossible.
A.Canyouthinkofreasonswhyconsumerdemandremainedunusuallystrong
following the stock market crash of 2000-02? B.In addition to
consumers, what other important contributors add to national
savings and the pool of resources available for investment?
C.Whyistheamountofnationalsavingsandthepoolofresourcesavailablefor
investment important to consumers? D.Free economic information is
available on the Internet from the Statistical Abstract of the
United States (http://www.census.gov/statab/www/) and the Economic
Report
ofthePresident(http://www.gpoaccess.gov/eop/).Unfortunately,thisimportant
information is often reported with a lag ofone to two years or
more.What can be
donetospeedthedeliveryofgovernmentstatisticsthatbettermeasurechangesin
consumer demand and consumer prices? CASE STUDY SOLUTION
A.According to theEconomic Report of the
President(2004),apotentialexplanation for the unusually strong
consumer demand in the period following the stock market
crashof2000-02isthathouseholdsraisedconsumptioninanticipationofastrong
improvementinthelabormarketthatwouldbolsterincome.Unusuallystrong
consumer demand may also have been fueled by a wave of low-cost
home mortgage Consumer Demand Presented by Suong Jian & Liu
Yan, MGMT Panel , Guangdong University of Finance. - 103 -
refinancingstemmingfromacombinationofhistoricallylowinterestratesand
technological advances that have made such transactions
easier.Another possibility
isthattheavailabilityoflow-interest-rateloansoncarsandotherbigticketitems
spurredhouseholdstoreplacecarsandotherdurablegoodsearlierthanthey
otherwise might have.
B.Itisimportanttorecognizethatconsumersavingisonlyonecontributortothe
amount of total saving in the overall economy.Corporations also
save in the form of retained earningsCthe difference between
after-tax profits and dividends.While retained earnings as ashare
of GDP fellduring the late-1990s, they rose following
thecrashof2000-02.Thisuptickincorporatesavinghasthepotentialtoreplace
some of the lost consumer savings during the post-crash
period.National saving is the sum of private saving by households
andcorporations plus government
saving.GovernmentsavingisequaltotheFederalbudgetsurplusplusthestateandlocal
governmentbudgetsurpluses.Nationalsavingroseasafractionof(GDP)during
the 1990s, but has fallen sharply since 2000.As a fraction of GDP,
national savings
nowstandsatthelowendofitsrangesinceWorldWarII.Althoughboth
government saving and private saving are above historic lows, the
fact that they are both low at the same time has led to the low
level of national saving.
C.Nationalsavingisimportantbecauseitrepresentstheportionofourcountry=s
currentincomethatisbeingsetasideforinvestmentinnewcapital.Inparticular,
national saving plus the net capital inflow from abroad equals
domestic investment. Greater saving and investment today boost
future national income, add to economic growth, and bolster future
consumption possibilities.To increase national saving, it
isnecessarytorestraingovernmentspending,increasethepropensityof
corporations to retain earnings for future investment, and raise
household savings.
D.Tobettermeasuretrendsinconsumerdemand,consumerprices,andproductivity
growth,rapidadvancesininformationtechnologymustbeefficientlyutilized.To
bettermeasureconsumerpricechanges,electronicscanninginformationmustbe
utilized.Price and production indexes must also reflect quality
adjustments for new products and technologies.Surveys of changes in
employment must also be refined. Insome instances, government
spending on datagatheringandanalysisneedsto
beincreased.Americansandtheirgovernmentsimplyneedtoknowwhat'sreally
happening in the economy. If the federal and state governments
prove incapable of providing high quality
statisticalinformationinatimelymanner,betterimitationofprivate-sectordata
gathering and analysis methods may not be sufficient.In that case,
it may become
necessarytoconsideranoutsourcingofsomedatagatheringanddataanalysis
Chapter 4 Presented by Suong Jian & Liu Yan, MGMT Panel ,
Guangdong University of Finance. - 104 -
responsibilitiestotheprivatesector.Forexample,theBureauofLaborStatistics
already outsources responsibility for monitoring Leading Economic
Indicators to the
ConferenceBoard.TheConferenceBoardisapremierbusinessmembershipand
researchnetworkworldwidethatlinksexecutivesfromdifferentcompanies,
industries and countries. The Conference Board has become a leader
in helping top executives build strong professional relationships,
expand their business knowledge,
andfindsolutionstoawiderangeofbusinessproblems.Foundedin1916,the
Board's twofold purpose is to improve the business enterprise
system and to enhance the contribution of business to society.A
not-for-profit, non-advocacy organization, The Conference Board's
membership includes more than 2,900 companies and other
organizations in 65 countries.
TheBLS-ConferenceBoardpartnershipmayformthebasisforother beneficial
public sector-private sector alliances with the potential to
speeddelivery of high-quality statistical information to the
public.