Suppose there are 25 people with a reservation price of $500, and the 26th person has a reservation price of $200.
What would the demand curve look like based on this information?
The correct answer and explanation is :
Based on the given information, the demand curve would show the quantity of people willing to pay at each price level, reflecting their reservation prices.
Demand Curve Description:
The demand curve typically slopes downward, showing that as the price decreases, more people are willing to purchase the product or service. In this case, the reservation prices tell us the maximum price each individual is willing to pay. Here’s how to interpret it based on the provided data:
- Reservation Price of $500: The first 25 individuals have a reservation price of $500, meaning they are each willing to pay $500 for the product. These 25 people would form the demand at a price of $500. If the price were set at $500, all 25 would purchase the product.
- Reservation Price of $200: The 26th person has a reservation price of $200, meaning they would only purchase the product if the price is $200 or lower. This person would not buy the product at a price above $200. Thus, at a price of $200, 26 people would be willing to purchase the product.
Demand Curve Characteristics:
- At a price of $500, the demand is 25 units, because the first 25 people are willing to pay $500 or more.
- At a price of $200, the demand is 26 units, since the 26th person will also buy at this price.
- For any price below $200, all 26 people are willing to buy, as their reservation price is $200 or higher.
Graphical Representation:
The demand curve would look like a step function (or a staircase curve) based on this scenario:
- From $500 down to $200, the demand is constant at 25 people.
- At a price of $200, the demand jumps to 26 people.
- Below $200, the demand remains at 26 people, as no further individuals are included.
Conclusion:
This demand curve is a discontinuous step curve, reflecting the individuals’ varying willingness to pay. The curve starts at a higher price point with a lower quantity and becomes flatter as the price decreases, with a sharp increase in quantity when the price hits $200.