Due by 11:59 PM Friday September 23 via by Blackboard Assignments

# Concepts and Critical Thinking

Please answer the following questions briefly (1-3 sentences). Use examples as necessary. Be sure to label graphs fully, if appropriate.

## Question 1

Describe, in your own words, the (i) price effect, (ii) real income effect, and (iii) substitution effect from a price change.

## Question 2

Under what conditions can the law of demand be violated (however theoretical)?

## Question 3

For each of the following pairs, which of the two goods is more likely to have a low price elasticity of demand (less elastic) and why?

### Part A

Demand for tangerines vs. demand for fruit

### Part B

Demand for beef next month vs. demand for beef over the next decade

### Part C

Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city

### Part D

Demand for insulin vs. demand for vitamins

## Question 4

Suppose that, holding prices constant, Alice has preferences over the number of books she purchases, illustrated in the table below.

Income Books
$5 5$10 6
$15 20$20 25
$25 26$30 10
$35 9$40 8
$45 7$50 6

Draw a smooth approximation of Alice’s Engel curve for books, and indicate the range(s) of income over which books are normal and/or inferior goods.

# Quantitative Applications

Show all work for calculations. You may lose points, even if correct, for missing work. Be sure to label graphs fully, if appropriate.

## Question 5

Steve spends his disposable income on meals at restaurants $$(r)$$ and paperback novels $$(n)$$. His usual restaurant meal costs $25, and paperback books cost$8. When Steve’s monthly income is $240, he goes out to eat 8 times and purchases 5 books. When his income rises to$282, he goes out to eat 10 times and purchases 4 books.

### Part A

Calculate the income elasticity for meals at restaurants $$(r)$$. Is this an inferior, necessity, or luxury good?

### Part B

Calculate the income elasticity for paperback novels $$(n)$$. Is this an inferior, necessity, or luxury good?

## Question 6

Kendra buys eggs $$(e)$$, bagels $$(b)$$, and coffee $$(c)$$ for breakfast for the week.

### Part A

When eggs are $2/carton, she buys 5 bagels. When the price of eggs falls to$1/carton, she buys 4 bagels. Calculate the cross-price elasticity between eggs and bagels. Are they complements or substitutes for Kendra?

### Part B

When eggs are $2/carton, she buys 3 cups of coffee. When the price of eggs falls to$1/carton, she buys 6 cups of coffee. Calculate the cross-price elasticity between eggs and coffee. Are they complements or substitutes for Kendra?

## Question 7

Sketch a graph showing an increase in the price of a good (on the horizontal axis, e.g. $$x$$ if you want). Indicate (i) the (real) income effect, (ii) substitution effect, and (iii) price effect on the graph. Labeling points and merely describing each of the three effects as a movement between specific points is sufficient.

## Question 8

The demand for gym memberships is given by

$q_D=500-5p$

### Part A

Write the inverse demand function.

### Part F

At what price is demand unit elastic, i.e. $$\epsilon_D=-1$$?

### Part G

What is the total revenue at the price you find in part (f)?