2) (a) Suppose that a good has a price elasticity equal to 0 (Ed=0). What does this mean? Draw a demand curve to illustrate.

(b) What does it mean if a good has a price elasticity equal to 1?

3) An economist determines that the price elasticity of demand for restaurant meals is 1.25. Interpret this value using the price elasticity of demand formula (using the method done in class)

4) (a) Suppose Ed=0.5 for a given good. If there's a 5% change in price, what is the change in quantity demanded (Qd)?

(b) Suppose once again that Ed=0.5, but there's now a 15% change in price (all else equal). Calculate the change in quantity demanded.

5) Briefly explain how total revenue (TR) will be affected in each of the following cases (use the TR formula):

(a) Demand is elastic and price increases

(b) The price elasticity of demand (Ed)=0.7 and price increases

(c) Demand is elastic and price decreases

(d) Demand is perfectly inelastic (Ed=0) and price increases

(e) Demand is inelastic and price decreases

6) "If a good is price inelastic, then increasing the good's price will result in a decrease in total revenue."

Is the above statement true or false? Explain.

1) (a) Define the term "Cross Elasticity of Demand."

(b) What does this measure tell you about the two goods involved?

(c) Suppose that the price of oranges increases from 60 cents per pound to $1.25 per pound as a result of a frost in Florida. As a result, the market demand for apples increases from 5000 pounds to 8000 pounds. Calculate the cross elasticity of oranges with respect to apples.

(d) Are the two goods above substitutes or complements? Use your answer in part (c) to explain.

2) Consider the following chart that shows price and sales data for two goods (DVD players and DVDs):

Price of DVD Players............Quantity of DVD Players Demanded...............Price of DVDS..............Demand for DVDs

$120.................................................5000.................................................$15........................18500

70..................................................9500.................................................$15........................32200

Questions:

(a) Calculate the Cross Elasticity between DVD players and DVDs based on the data provided

(b) Are these two goods substitutes or complements? Use your answer in part (a) to explain.

3) Kevin has just received a large promotion and his income has risen from $200 to $400 per week. As a result, his demand for good A has fallen from 10 units per week to 3 units per week.

(a) Calculate Kevin's income elasticity of demand for good A

(b) Is good A a normal or inferior good for Kevin? Explain.

4) Marcus experiences an increase in income from $400/week to $450 per week. His consumption of chips goes up from 2 bags per week to 5 bags per week.

(i) Calculate Marcus' income elasticity of chips

(ii) Are chips a normal or inferior good for Marcus? Explain.

13. Alex's income has increased from $3,000 to $5,000. Alex increased his consumption of bagels from 4 to 8 a month and decreased his consumption of doughnuts from 12 to 6 a month. Calculate Alex's income elasticity of demand (a) bagels and (b) doughnuts?