Mme. Asterix asks her housekeeper M.Obelisk to get her some beef tenderloin for
ID: 1189163 • Letter: M
Question
Mme. Asterix asks her housekeeper M.Obelisk to get her some beef tenderloin for dinner from the supermarket. She would like to buy 1kg for her family if the price was 70 euros per kg, however, if the price was only 20 euros per kg then she would like to but 3Kgs(and invite some friends over for dinner). M. Oblisk wonders" the woman is nuts; she wants to pay less in total for more meat than less! And she actually thinks the supermarket would sell more meat for less money too! go figure!.
a. Is it irrational behaviour on the part of Asterix to make her purchase plans as described, i.e., that she wants to pay less in total for more meat? why or why not?(Hint: Calculate her expenditure under each scenario, and consider the relationship between expenditure and elasticity.)
b. is it sensible on her part to think that supermarkets may sometimes sell more meat for less money compared to some other times? why or why not?
Explanation / Answer
(a) When the price is 70 euros per kg, then the quantity demanded by Mme Asterix is 1 kg. Therefore when the price is €70 per kg, then the expenditure incurred by Mme Asterix is €70 (=70×1).
When the price is 20 euros per kg, then the quantity demanded by Mme Asterix is 3 kgs. Therefore when the price is €20 per kg, then the expenditure incurred by Mme Asterix is €20 (=20×3).
This means that the elasticity of demand is less than one; that is, demand is inelastic.
Whenever demand is inelastic, the expenditure incurred by the consumer falls with a fall in price. Therefore, there is nothing irrational of Asterix to make her purchase plans as described. She simply wants to pay less for less more meat because the elasticity of her demand for meat is less than unitary elastic.
(b) It is completely sensible for her to think that the supermarket may sometimes supply more meat for less overall revenue compared to some other times.
Consider the following figure.
During time A, the quantity supplied is 10, then the revenue of the firm is $120 (=$12×10). During time B, the quantity supplied is 11, then the revenue of the firm is $110 (=$12×10). An increase in supply caused the firm to supply more quantity at lower revenue. Therefore, it is possible that the supermarket may sometimes supply more meat for less overall revenue compared to some other times.