The Income Elasticities of demand for movies, dental services, and clothing have been estimated to be -3.4, -1, and -0.5, respectively.

a) Interpret these coefficients.

b) What does it mean if an income elasticity coefficient is negative?

QUESTION

a) Briefly explain the Total Revenue Test.

b) How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or remain unchanged?

1) Price falls and demand is inelastic.

2) Price rises and supply is elastic.

3) Price rises and demand is inelastic.

4) Price falls and demand is elastic.

5) Price rises and supply is inelastic.

QUESTION

a) Use the ideas of consumer surplus and producer surplus to explain why economists say competitive markets are efficient.

b) Why are below- or above-equilibrium levels of output inefficient, according to these two sets of ideas?