Question 10- Possible Fault

[Becoming An Actuary]

I think Question 10, the question about beef and fish being perfect substitutes, may be flawed. Read my argument below and tell me what you think. It's an email that I'm going to send to the ombudsperson.

Hello,
This is in regards to Question 10 of Course 2, May 2003. Just as a note, my argument and opinion on the answer is shared with a Professor in Economics from the University of Waterloo. Question 10 reads:

Consumers view fish and beef as substitutes. Suppose that medical studies show that eating fish substantially reduces the risk of certain types of cancer.
What effects will this information have on the prices of fish and beef and the quantities consumed of each commodity?
(A) The price of fish will decrease, and the quantity of fish consumed will decrease.
The price of beef will increase, and the quantity of beef consumed will increase.
(B) The price of fish will decrease, but the quantity of fish consumed will increase.
The price of beef will increase, but the quantity of beef consumed will decrease.
(C) The price of fish will increase, and the quantity of fish consumed will increase.
The price of beef will decrease, and the quantity of beef consumed will decrease.
(D) The price of fish will increase, but the quantity of fish consumed will decrease.
The price of beef will decrease, but the quantity of beef consumed will increase.
(E) The price of fish will increase, and the quantity of fish consumed will increase.
The price of beef will increase, but the quantity of beef consumed will decrease.

Clearly, the demand for fish rises, forcing the price of fish to rise also (ie. The price of fish will increase, and the quantity of fish consumed will increase). This eliminates A, B, D.
Next, since the demand for fish rises, and fish and beef are substitutes, then the demand for beef will consequently fall (which is consistent with the remaining answers C and E).

Here is where I think the answers are defective.

The effect on the price of beef cannot be completely determined without knowing how the price of beef behaves with respect to the price of fish. We can deduce that since the demand for beef falls, there will be downward pressure on the price of beef. However, since the price of fish increases, there will be simultaneous upward pressure on the price of beef (since beef and fish are substitutes). Now, which force has a dominating effect (the downward pressure or the upward) cannot be determined without the knowledge of the relative (cross) elasticity of beef and fish.

So, it's clear that the following effects will occur:
The price of fish will increase.
The quantity of fish consumed will increase.
The quantity of beef consumed will decrease.

However, with the given information one cannot conclude how the price of beef will be affected. Thus, either C or E can be true; which one is true is not known however.

I feel that the answer key should be modified to incorporate the afore mentioned argument. In other words, I feel that C and E should be acceptable answers.

[wgcdre]

Yes! I thought that too during the exam. People will initially demand less beef. But afterwards, since the cross price elasticity is positive (substitutes), people will also demand more beef when the price of fish goes up.

However I picked C.
I picked C because there can't be a shift in the supply curve.

And if there's a shift in the demand curve, price and quantity must move in the same direction, which is not the case with choice E.

[TenaciousMV]

I agree the question is a bit ambiguous. Between the two choices you have it reduced to, I found that the correct choice was rather clear. Still, it would not shock me if the SOA takes a longer look at it. Good luck.

[E]

I haven't tried to prove this with indifference curves and all, but I'm fairly sure that the cross-price elasticity is only relevant if the quantity consumed of fish doesn't change. Think about it; people's appetite is only so large. If their demand for fish increases, the quantity consumed will also increase (barring a shift in supply, which we have no information on). If people consume more fish, they must consume less beef, hence the term substitutues; people substitute away from beef consumption and make fish a larger portion of their diet.

The only way the price of beef wouldn't change is if beef supply is perfectly elastic--but none of the answer choices involve the price of beef not changing, so C just makes the most sense (to me).

[Summer]

during the exam i was thinking along those lines, but in the end, i ended up choosing the right choice.

[Wigmeister General]

L O S E R S !!!!!!!


STOP WHINING ALREADY

I have no sympathy --

[gmoney88]

I think this was a pretty straight forward question. If the study proves fish to be a cancer reducer, then the demand curve for fish will shift up. That is obvious. Therefore, the price and quantity demanded of fish will go up.

Now, since they are substitutes, because the demand for fish has gone up, the demand curve for beef will essentially shift down. This will cause both quantity demanded and price to go down.

Hope this helps.

[Incredible Hulctuary]

I thought it was straightforward too and answered C (which matches their answer key).

But now that you've brought it to my attention, I do see a possibility where E could be correct. If beef has a U-shaped supply curve, a decrease in the demand curve could lead to an increase in price along with the decrease in quantity.

[Becoming An Actuary]

I thought it was a straight-forward question also, but I guess I over-analyzed it (thinking that the SOA was out to trick us!). Hopefully, the SOA will see that my argument is a possibility though. Ya never know!

[Mr. BoH]

Originally Posted by Becoming An Actuary

Just as a note, my argument and opinion on the answer is shared with a Professor in Economics from the University of Waterloo.

If this is true, U of Waterloo needs to reconsider giving this person tenure.

This is basic microeconomics 101.