7. A recent study determined the following elasticities for Volkswagen Beetles:

Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.

a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.

b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.

8. In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii)

elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram.

a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2.

b. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand.

c. Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month.

d. Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.