Questions: Price Consumption Curve and Derivation of Demand

Question 1

As the price of coffee falls step by step, a consumer's optimal bundle traces the price consumption curve. What does plotting each (coffee price, optimal coffee quantity) pair on a separate graph produce?

• A. The income expansion path for coffee
• B. The consumer's individual demand curve for coffee
• C. A single indifference curve for the consumer
• D. The budget constraint at a fixed coffee price

Answer: (B)

Each point on the PCC tells you the optimal quantity of coffee at a specific price. Translating those (price, quantity) pairs into price-quantity space produces the demand curve. This derivation matters because it shows demand curves are not empirical approximations — they are the logical consequence of utility maximization under a budget constraint.

Question 2

A consumer has L-shaped (Leontief) indifference curves — they always buy goods X and Y in a fixed 1:1 ratio. What does this imply about their demand curve for good X?

• A. The demand curve is perfectly elastic — they are infinitely sensitive to price
• B. The demand curve is perfectly inelastic — quantity demanded does not change with price
• C. The demand curve slopes upward — lower prices mean they buy less X to maintain the ratio
• D. The demand curve cannot be derived using the price consumption curve method

Answer: (B)

L-shaped indifference curves mean the consumer always consumes X and Y in a fixed ratio regardless of relative prices. When the price of X falls, the budget line rotates but the optimal ratio doesn't change — only total spending adjusts. The quantity of X consumed stays constant: perfectly inelastic demand. The preference geometry directly determines demand curve shape.

Question 3

The shape of a consumer's demand curve reflects the shape of their underlying indifference curves.

• T. True
• F. False

Answer: True

The demand curve is derived directly from the price consumption curve, which traces optimal tangency points as price changes. Preferences determine indifference curve shapes, which determine where budget lines are tangent, which determines the PCC, which determines the demand curve. Elasticity reflects preference structure — perfect complements produce inelastic demand; easy substitutability produces elastic demand.

Question 4

The price consumption curve is constructed by shifting the budget line parallel to its original position.

• T. True
• F. False

Answer: False

A price change ROTATES the budget line, it does not shift it. If the price of good X falls, the X-axis intercept moves outward (the consumer can now buy more X with the same income) while the Y-axis intercept stays fixed. A parallel shift would reflect a change in income, not a price change. The PCC traces optimal bundles as the budget line rotates around the Y-axis intercept.

Question 5

Why does deriving the demand curve from the price consumption curve reveal more than simply observing that people buy more when prices fall?

Model answer: The PCC derivation shows the demand curve is the logical consequence of utility maximization under a budget constraint — not just an empirical pattern. It reveals WHY demand has the shape it does: the geometry of indifference curves (preference structure) determines elasticity. Perfect complements produce inelastic demand; highly substitutable goods produce elastic demand. The derivation also enables welfare analysis, connecting observed demand behavior to underlying utility, which is required for measuring consumer surplus and evaluating policy.

The theoretical grounding matters for policy. Knowing that demand curves emerge from optimization means you can predict how they change when income changes, when related prices change, or when preferences shift. A purely empirical description can only report past behavior; the utility-based derivation explains behavior and enables prediction across novel circumstances.