Help for Questions for Critical Thinking 2
Questions for Critical Thinking 2: SOLUTIONS
Salvatore’s Chapter 4:
a. Discussion Questions: 8 and 11.
8. {5 points]
If the price increases by 10 percent, by how much does the quantity of household ( a) natural gas and ( b) electricity change in the short run and in the long run? ( Hint: Use the price- elasticity values in Table 4- 3.)
In general, . Using the numbers we have
Short-run
Long-run
Gas
Electricity
11. [5 points]
Suppose that the cross- price elasticity of demand between McIntosh and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?
NOTE: Change “between apples and cheese is 0.4” to “between apples and cheese is negative 0.4.”
The relationship between two commodities could be substitutes, complements, or independent.
Remember that a positive cross price elasticity implies the two goods are substitutes, and a negative implies they are complements.Also the closer is the elasticity to zero, the weaker is the relationship. So
For McIntosh and Golden Declicious, a cross-price elasticity of 0.8 shows they are close substitutes.
For apples and apple juice, a cross-price elasticity of 0.5 shows they are moderately strong substitutes.
For apples and cheese, a cross-price elasticity of -0.4 (see note) shows they are moderate complements.
For apples and beer, a cross-price elasticity of 0.1 shoes they are weak substitutes, or independent.
b. Problems: 3(a) and (b), 7, 9, and 15.
3. [5 points]
Starting with the estimated demand function for Chevrolets given in Problem 2, assume that the average value of the independent variables changes to N = 225 million, I = $ 12,000, P F = $ 10,000, P G = 100 cents, A = $ 250,000, and P I = 0 ( i. e., the incentives are phased out). ( a) Find the equation of the new demand curve for Chevrolets. ( b) Plot this new demand curve, D' C , and, on the
Salvatore’s Chapter 4:
a. Discussion Questions: 8 and 11.
8. {5 points]
If the price increases by 10 percent, by how much does the quantity of household ( a) natural gas and ( b) electricity change in the short run and in the long run? ( Hint: Use the price- elasticity values in Table 4- 3.)
In general, . Using the numbers we have
Short-run
Long-run
Gas
Electricity
11. [5 points]
Suppose that the cross- price elasticity of demand between McIntosh and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?
NOTE: Change “between apples and cheese is 0.4” to “between apples and cheese is negative 0.4.”
The relationship between two commodities could be substitutes, complements, or independent.
Remember that a positive cross price elasticity implies the two goods are substitutes, and a negative implies they are complements.Also the closer is the elasticity to zero, the weaker is the relationship. So
For McIntosh and Golden Declicious, a cross-price elasticity of 0.8 shows they are close substitutes.
For apples and apple juice, a cross-price elasticity of 0.5 shows they are moderately strong substitutes.
For apples and cheese, a cross-price elasticity of -0.4 (see note) shows they are moderate complements.
For apples and beer, a cross-price elasticity of 0.1 shoes they are weak substitutes, or independent.
b. Problems: 3(a) and (b), 7, 9, and 15.
3. [5 points]
Starting with the estimated demand function for Chevrolets given in Problem 2, assume that the average value of the independent variables changes to N = 225 million, I = $ 12,000, P F = $ 10,000, P G = 100 cents, A = $ 250,000, and P I = 0 ( i. e., the incentives are phased out). ( a) Find the equation of the new demand curve for Chevrolets. ( b) Plot this new demand curve, D' C , and, on the