1. The income elasticity of demand is _____ (positive/negative) for normal goods and _____ (positive/negative) for inferior goods.

2. If a 20 percent increase in income increases the quantity of iPods demanded by 30 percent, the income elasticity of demand is _____.

3. The cross-price elasticity of demand is _____ (positive/negative) for substitute goods and _____ (positive/negative) for complementary goods.

4. If a 10 percent increase in the price of natural gas increases the quantity of residential electricity demanded by 18 percent, the cross-price elasticity of demand is _____.

5. If a 10 percent increase in the price of tennis rackets decreases the quantity of tennis balls demanded by 15 percent, the cross-price elasticity of demand is _____.

6. Income and Starbucks Coffee Shops. Starbucks just hired you to determine whether your city could support a new Starbucks coffee shop. There are currently four Starbucks coffee shops in the city, and each has just enough customers to survive. The average household income in the city is expected to increase by 10 percent per year for the next few years. Suppose the income elasticity of demand for Starbucks coffee products are 1.25. The population of the city is constant.

a. By what percentage will the demand for coffee increase each year?

b. How soon will the area have enough demand to support a fifth Starbucks?

7. Gas Prices and Public Transit Ridership. Consider the effect of higher gasoline prices on public transit ridership. The initial price of public transit is $2.00 per ride and the initial ridership is 100,000 people per day. Suppose the elasticity of transit ridership with respect to the price of gasoline is +0.667 (or 2/3) and the price of gasoline increases by 30 percent.

a. Assume the price of public transit remains at $2. Use a graph to show the effect of the increase in the gas price on transit ridership.

b. Suppose the transit authority matches the increase in the price of gasoline, increasing the transit fare by 30 percent. The price elasticity of demand for transit ridership is 0.333 (or 1/3). Use your graph to show the combined effect of the gas tax and higher transit fare.

c. Explain why the net change in transit ridership is positive or negative.

8. iPods and iTunes. You have been hired to predict the effects of increasing the price of iTunes songs by 10 percent, from $0.99 to $1.09. You are interested in the effects of the price hike on the number of songs downloaded legally from iTunes, the number of songs downloaded legally from other online music stores, the number of iPod players sold, and the number of CDs sold in stores. Given the hypothetical elasticities in the following table, fill in the blanks. Recall that conventional practice for the price elasticity of demand of a product uses the absolute value of the elasticity

.:.

9. Find the following elasticities from the USDA Web site.

a. Organic broccoli in the United States: own price elasticity = _____; expenditure (similar to income) = _____; cross-price of conventional broccoli = _____. If improved production techniques decreased the equilibrium price of organic broccoli by 10 percent, the quantity of organic broccoli would increase by _____percent and the quantity of conventional broccoli would decease by _____percent.

b. Soft drinks in the United States: own price (Marshallian is regular demand) = _____. If a tax on soft drinks increased the equilibrium price by 10 percent, the quantity of soft drinks would decrease by _____percent.

c. Fish in Tanzania. Own price = _____; income = _____. If the price of fish increases by 8.37 percent, the quantity demanded would decrease by_____ percent. If per-capita income increases by 20 percent, the quantity of fish demanded would increase by about percent