1.A consumer consumes only two goods, pizza and beer. The consumer's preferences for beer and pizza exhibit diminishing marginal rate of substitution. For this consumer beer and pizza are complements. On a graph illustrate the income and substitution effects that result from an increase in the price of pizza.

2. Hot Dogs and Hot Dog Buns are perfect complements. Illustrate graphically the income and substitution effects of a decrease in the price of hot dogs.

3. Virginia Postrel reports on a study of internet book sales by Austan Goolsbee and Judy Chevalier. Goolsbee and Chevalier find that "Raising prices by 1 percent at BN.com reduces sales about 4 percent but increases sales at Amazon.com by only about .02 percent" and a 1 percent increase in price at Amazon reduces sales (at Amazon) by only .5 percent.

a) What does this information tell you about the price elasticity of demand at Amazon and Barnes and Noble? Cross-price elasticity of demand?

b) What happens to revenue at BN.com when BN increases price?

c) What happens to revenue at Amazon when Amazon increases price