Question

Consider the demand for "pet rocks" (you can look these up on the Internet - they were a thing back in the 1970s). The demand for pet rocks is given by QD = 100 - 20 P + 50 A where Q is the quantity, P is the price, and A is advertising. Suppliers in the industry raise the price from $3 to $4, and raise advertising from 1 unit to 2 units. An industry newsletter says: "Prices are up; demand is up! Pet rocks break through the law of demand! Economists are stymied!" What's going on? A. The pet rock market is one of the rare occasions when the law of demand is actually violated. B. The pet rock market does not violate the law of demand - raising the price does not lead to an increase in demand. C. Economists are easily stymied, so this is not a surprise. (You should not pick this answer, even if you think it is true!)

Answer 1

The answer is (b) The pet rock market does not violate the law of demand - raising the price does not lead to an increase in demand.

The law of demand states that all else being constant, price and quantity demanded to have an inverse relationship. All else constant is the key here. It is violated as advertisement is also increased. If only the price was increased and advertisement was held constant, the quantiity demanded would decrease by 20 units and hence the law of demand is not violated.