(1) [Calculating elasticities: 9 pts] Suppose that when the price of milk is $2 per gallon, families drink ten gallons per month; but when the price is $4 per gallon, families drink only six gallons per month. a. Compute the price elasticity of demand using the so-called are formula. [See slideshow handout for formula] b. Recompute the elasticity with milk measured in quarts rather than gallons. c. Recompute the elasticity with the price of milk measured in cents rather than dollars. (2) [Extreme cases: 12 pts] The diagram at right P shows extreme cases of demand and supply. The (I demand curve is vertical and the supply curve is eman Su 1 horizontal. y Q a. Is supply in this diagram perfectly elastic, perfectly inelastic, or unitary-elastic? b. What is the value of the elasticity of supply? Give a number. c. Is demand in this diagram perfectly elastic, perj'ectbz inelastic, or unitary-elastic? d. What is the value of the elasticity of demand? Give a number. (3) [Cross-price elasticity: 12 pts] Use the information given below to determine whether each pair of goods (in italics) consists of substitutes or complements. Also compute the cross-price elasticity of demand. [Hint: The sign is important.] Substitutes or Computed cross- complements? price elasticity a. The price of hamburger meat rises by 8%, causing the quantity of hamburger buns consumed to decrease by 4%. b. The price of soft drinks rises by 20%, causing the quantity of bottled water sold to increase by 5%. (4) [Income elasticity: 12 pts] Use the information given below to determine whether the good (in italics) is a normal good or an inferior good. Also compute the income elasticity of demand. [Hint: The sign is important.] Normal good or Computed income inferior good? elasticity a. National income rises by 5%, causing the number of high-definition televisions sold to increase by 6%. b. The income of Iowa residents rises by 5%, causing sales of second- hand clothing to fall by 1%