ECON 356

In Class Exercise Five

1.  Summarize the relationship between price elasticity of demand, changes in price, and changes in total revenue (and how marginal revenue relates as well).

2.  Assume hamburger is an inferior good to both consumer A and consumer B.   If A's income decreased by 50% and B's income increased by 50% - what would you expect to happen to the market demand curve for hamburger?  Explain and draw A's, B's and the market curve.

3.  What would it mean if a consumer has an Engel curve that has a steeper slope at higher income levels (a kink)?  Draw this and explain.  Does this make sense?  Assume a normal good.

4.  We assume an average income for market curves.  Given that, what would a "market" Engel curve look like for a normal good?

5.  If you expected a long period of declining GDP, what kinds of companies would you choose to invest in?  Explain.

6.  Draw the "market" Engel curve for the following goods:  food, Hawaiian vacations, Kmart brand sneakers ($3.99/pr).  How would they all differ and why?

7.  Suppose your budget is spent entirely on two goods:  bread and butter.  If bread is an inferior good, can butter be an inferior good as well?  Explain.