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Question 1 (40%): The demand function of the peanut butter market is given as QD=40-2P, and the market equilibrium price is $10. If the price

Question 1 (40%): The demand function of the peanut butter market is given as QD=40-2P, and the market equilibrium price is $10.

  1. If the price increased to $11, compute the (point) elasticity at $10, and the arc elasticity between $10 and $11. (10%)

  2. If the price increased to $15, compute the (point) elasticity at $10, and the arc elasticity between $10 and $15. (10%) Is the point elasticity different from your previous answer? (5%)

  3. The average income of the neighborhood increased from $50,000 to $60,000. We observe the peanut butter sold dropped from 20 to 16. Compute the income elasticity of peanut butter. (When not specified, you should compute the point elasticity) (10%) What type of good is peanut butter? (5%)

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