ECON 356

Homework Assignment Three

Due Tuesday, Oct. 12

Directions:  Copy and paste this into a word document and then type your answers.  Graphs do not have to be typed.

(35 pts.)

 

1.  State the most obvious sign (positive or negative) of the following elasticities (2 pts. each = 10 pts.)

  1. The price elasticity of demand for ice cream at the point of maximum total revenue. Answer:

  2. The cross price elasticity of demand for ice cream with respect to a change in the price of frozen yogurt. Answer:

  3. The income elasticity of demand for Caribbean cruises. Answer:

  4. The income elasticity of demand for Wal Mart brand Cola. Answer:

  5. The cross elasticity of demand for corn ready to be popped with respect to a change in the price of popcorn machines. Answer:

 

2.  Economists estimate the following income elasticities of demand:  Fresh salmon = 2.14, Cigarettes, teenagers = -0.44, Cigarettes,

adults = -0.10.

    a.  Does the income elasticity associated with salmon make sense?  Explain why or why not?  (3 pts.)

    b.  What would an economist call fresh salmon (with respect to income elasticity)?  I am not asking for "elastic" here.  (1 pt.) __________________

    c.  Does the negative sign in front of cigarettes make sense?  Explain why or why not?  (3 pts.)

    d.  Explain the difference between teenagers and adults (with respect to cigarette income elasticity).  (3 pts.)

    e.  Draw three Engel curves on the same graph - each representing the three goods above.  Make sure they are labeled clearly.  (4 pts.)

 

3.  Economists have estimated the following cross price elasticities:  Pepsi Cola with a change in price of Coca Cola = 0.80, Coca Cola with a change in the price of Pepsi Cola = 0.61.  Explain why the two elasticities are different -- what does the difference mean?  (4 pts.)

 

4.  You are renting an apartment.  The utilities (water and electricity) are included in your rental payment (which is the same every month). 

 

    a.  Draw your budget constraint.  You should have a composite good on one axis and utilities on the other.  Denote your income as Y.  (2 pts.)

 

    b.  Explain when it would be smart for your landlord to start charging for utilities on a per use basis separate from your rent - explain both graphically and in words.  (5 pts.)