7.

Based on the following table which indicates expenditure of the household on a

commodity,

answer the questions that follow ( The price of the good is Br.10 )

Income

( Br. / month)

Quantity Demanded

( units / month )

10,000

50

20,000

60

30,000

70

40,000

80

50,000

90

A)

Calculate income elasticity of demand, if income increases from Br.10, 000 to

Br.

20,000 and if income increases from Br.40, 000 to Br. 50,000.

B)

Is this a normal or an inferior or a luxury good? Justify.

C)

Does the proportion of household income spent on this good increase or decrease as

income increases? .Why?

8.

When price of tea in local caf rises from Br. 10 to 15 per cup, demand for coffee rises

from 3000 cups to 5000 cups a day despite no change in coffee prices.

A)

Determine cross price elasticity.

B)

Based on the result, what kind of relation exists between the two goods?

Suggested reading materials

A. Koutsoyiannis, Modern Microeconomics, 2nd edition, 1979

D.N.Dwivedi, 1997,

Micro Economic Theory

, 3rd edition., Vikas Publishing

R. S. Pindyck and D. L. Rubinfeld, Microeconomics, 2nd edition,1992

Varian, 2010, Intermediate Microeconomics: A Modern Approach, 8

th

edition

C.L.Cole,

Micro Economics: A Contemporary Approach

.

Ferguson & Gould's, 1989,

Microeconomic Theory,

6th edition.

E. Mansfield, 1988, Microeconomics:Theory and Applications

Arnold, 2008, Microeconomics, 8

th

edition, International student edition

40