PART A. The following questions deal with the market for furniture. In the column I, answer with the following key:

A: equilibrium price increases

B: equilibrium price decreases

In column II, answer with the following key:

A: equilibrium quantity increases

B: equilibrium quantity decreases

Col. I Col. II

_A_____A___1. The population increases.

__B_____B___ 2. The price of housing increases (housing and furniture are complements).

__________ 3. The price of wood increases (wood is an input into making furniture).

__________ 4. Consumer incomes fall (furniture is a normal product).

__A_____B__5. The number of firms manufacturing furniture decreases.

__B____A___6. Interest rates decrease.

________7. A negative supply shock hits the furniture market.

________8. Taxes are decreased on furniture manufacturers.

_________9. A new technology makes it cheaper to manufacture furniture.

_________10. Subsidies are increased to furniture manufacturers.

PART B:

1.A product has a price elasticity (of demand) equal to -1.50. If price increases by 8 percent, what will be the decrease in quantity demanded?

2.A product has an income elasticity of 0.8. If income rises by 6 percent, what will be the increase in demand?

3.In question 2, is the product most likely a luxury or necessity? Why?

4.The cross price elasticity between two products, L and M, is 0.60 (that is, the change in demand for L with respect to the change in the price of M). If the price of M rises by 10 percent, by how much will the demand for L change?

5.In question 4, are L and M substitutes or complements, and why?