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1. An increase in subway fares in New York City will boost your expenditures on subway rides If a.) the supply of subway rides is elastic. B) the supply of subway rides is inelastic. l3} your demand for subway rides is inelastic. El} your demand for subway rides is elastic. 2. The more substitutes available for a product. A} the larger is its income elasticity of demand. B] the smaller is its income elasticity of demand. C} the smaller is its price elasticity of demand. D] the larger is its the price elasticity of demand. 3. The cross elasticity of demand measures the responsiveness of the quantity demanded of a particular good to changes in the prices of A} its complements but not its substitutes. Et} its substitutes but not its complements. C} its substitutes and its complements. D} neither its substitutes nor its complements. 4. ll goods are complements. definitely their A} income elasticities are negative. E} income elasticities are positive. '3} cross etasticitles are positive. D} cross etasticities are negative. 5.If a rise in the price of good 1 decreases the quantity of good 2 demanded. A} the cross elasticity of demand is negative. B} good 1 is an inferior good. C} good 2 is an inferior good. D} the cross elasticity of demand is positive. E. The increase in the demand for widgets. shown in the gure above. is cauaed by an increase in average incomes. Therefore. widgets A} are a normal good. E} are elastically demanded. G} are an inferior good. D} are inetasttcally demanded. ?.The income elasticity of demand is high for A} shelter. Eli luxuries. C] clothing. DJ food. 8. To say that turnips are inferior goods means that the income elasticity A} is definitely greater than 1. 4 B) is negative. C) is positive but could be greater than or less then (or equal to) 1. D) is definitely between 0 and 1. 9. An increase in Abigail's income decreases her demand for cassette tapes. For her, cassette tapes are A) a complement to any good. B) a normal good. C) an inferior good. D) a substitute good. 10. Goods whose income elasticities are negative are called A) superior goods. B) inferior goods. C) normal goods. D) complements B. Think about your Learning 1. What is the most important lesson you gained on this session? 2. Do you have questions about the topic? 5Part 2 (Problem Solving) Question: According to a Honda press release on October 23, 2006, sales of the fuel-efficient four- cylinder Honda Civic rose by 7.1% from 2005 to 2006, Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline rose from $2.27 per gallon to $2.57 per gallon. Using the midpoint method, calculate the cross-price elasticity of demand between Honda Civics and regular gasoline. According to your estimate of the cross-price elasticity, are the two goods gross complements or gross substitutes? Does your answer make sense? Note: This is the formula for midpoint method. For % change in the quantity, the denominator is the average of the old + new, same with the computation for the % change in price. Q2 - QT %AQ Es = (Q2 + (1)/2 9%AP P2 - P (P2 + PI)/2 3The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price olasticities of demand Air-conditioning units and kilowatts of electricity -0.34 Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) -0.28 and gasoline Mcdonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Questions: a. Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question? b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's burgers and Burger King burgers less than the cross-price elasticity of butter and margarine? c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity of Coke demanded. d. Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded. 2What I Know Questions: What I Learned (Activity 4) 1. What is Cross Price Elasticity of Demand? 2. What is Income Elasticity of Demand