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HOMEWORK #1 Question 1:
a) The per capita CD sales are higher in the U.S. than in Mexico, while per capita cassette sales are lower in the U.S compared to Mexico because of the income elasticity of demand for these goods. CDs are normal goods and demand for them rises as income rises. The per capita sales of CDs are higher in the U.S. because U.S. citizens have higher income than Mexicans. On the other hand, music cassettes are considered inferior goods because of new technological advancements and as income rises, demand for them falls as people are starting to buy more modern products such as CDs. Due to income elasticity the average American consumer can afford to buy CDs rather than music cassettes, while Mexicans with their lower incomes choose cassettes over CDs.

b) A diagram for U.S. CD-market demand:
(i) Increase in the price of CDs – changes in price cause movement along the demand curve. When the price of CD increases, the quantity demanded will decrease because the Law of Demand states that price and quantity demanded are inversely related.
(ii) Rise in the ownership of CD players – CDs and CD players are complimentary goods, which means that as people own more CD players, the demand curve for CDs will shift to the right
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D1 D

Q (iii) Fall in the price of music cassettes – CDs and music cassettes may be considered substitutes and therefore as the price of cassettes falls, more people will start buying cassettes instead of CDs and the demand curve for CDs will shift to the left
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D D1 Q
c) A diagram for Mexican CD-market demand:
(i) Fall in advertising by music publishers such as Sony and Time Warner – advertising shapes tastes and

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