1. Suppose that after hurricane Irene, the average income in Cape Charles, Virginia decreased by 8 percent. In response to this change in income, suppose the quantity of steak demanded in Cape Charles (holding the price of steak constant) decreased by 18 percent. What is the income elasticity of demand for steak in Cape Charles? The income elasticity of demand for steak in Cape Charles is ___

2. Suppose the price elasticity of demand for cigarettes is 0.8 and that the government can essentially set the price of cigarettes by altering the tax rate. If the government wishes to reduce the quantity of cigarettes demanded by 25

percent, how much must it raise the price of cigarettes? The government, to achieve its goal, must raise the price of cigarettes by ___ percent.

3. A small decrease in supply can lead to a large increase in equilibrium price when

a. demand is perfectly elastic.

b. supply is perfectly elastic.

c. demand is relatively elastic.

d. demand is relatively inelastic.