Question

Which of the following pairs of goods would be expected to have a positive cross-price elasticity of demand? *

A) coffee and tea.

B) gasoline and cars

C) tennis racquets and tennis balls.

D) hot dogs and hot dog buns.

As the price of socks increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of shoes? (Socks and shoes are complements.) *

A) Equilibrium price would increase and equilibrium quantity would decrease.

B) Equilibrium price and quantity would both decrease.

C) Equilibrium price would decrease and equilibrium quantity would increase.

D) Equilibrium price and quantity would both increase.

As we move up the demand curve, the price elasticity of demand *

A) increases

B) decreases

C) becomes unitary

D) does not change

If the price of lemonade increases relative to the price of grape juice, the demand for: *

A) grape juice will decrease.

B) grape juice will increase.

C) lemonade will decrease.

D) lemonade will increase.

Suppose a consumer's income increases from $30,000 to $36,000. As a result, the consumer increases her purchases of compact disks (CDs) from 25 CDs to 30 CDs. What is the consumer's income elasticity of demand for CDs? *

A) 0.5

B) 1.0

C) 1.5

D) 2.0

Answer 1

1. A) coffee and tea

Positive cross elasticity implies that if there is increase in price of X then the quantity demandedof Y will increase. That is, X and Y are substitute goods.

2. B) Equilibrium price and quantity would both decrease.

As the price of socks increases, the quantity demanded of socks will decrease. Since socks and shoes are complements and demanded together, the demand for shoes will decrease. The demand curve in the market of shoes will shift leftward and at the new intersection of demand and supply, the equilibrium price and quantity will decrease.

3. A) increases

4. B) grape juice will increase.

If the price of lemonade increases relative to the price of grape juice then demand for grape juice would increase. This is because at higher price the quantity demanded of lemonade will decrease. Now grape juice will be relatively cheaper and people will start substituting lemonade with grape juice.

5. B) 1.0

Income elasticity of demand= percentage change in quantity demanded / percentage change in income

percentage change in quantity demanded = (30-25)/25 x 100 = 20

percentage change in income =  ($36,000-  $30,000)/ $30,000 x 100 = 20

Income elasticity of demand= 20/20 = 1