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101_PS4_ans_03

101_PS4_ans_03 - Econ 101 Answers for Problem Set 4 Answers...

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Unformatted text preview: Econ 101 Answers for Problem Set 4 Answers to Review Questions 1. Price changes affect quantity demanded for two reasons: They alter the attractiveness of substitute goods and they alter the real value of the consumer’s purchasing power. The second effect grows larger as the share of the consumer’s budget spent on the good increases. 2. Elasticity of demand at any point is the price-quantity ratio at that point times the reciprocal of the slope of the demand curve. The slope, and hence its reciprocal, is constant along a straight-line demand curve, but the price quantity ratio—and hence price elasticity of demand—declines as we move down the curve. 3. If the demand for a good is inelastic with respect to its price, an increase in price will lead to an increase in total expenditure. 4. Because the algebraic sign of the elasticity of demand for a good with respect to its own price is always negative, knowing that sign conveys no useful information. In contrast, the elasticity of demand for a good with respect to the price of another good can be either positive or negative, so it is important to keep track of the sign.good can be either positive or negative, so it is important to keep track of the sign....
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101_PS4_ans_03 - Econ 101 Answers for Problem Set 4 Answers...

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