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elast4a

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Additional Problem #4 Answers : Elasticity Complete each statement or answer the question in the spaces provided. (1) The price elasticity of demand for a new car model called Sputter is estimated to be equal to -.40. This means that a 1% increase in Sputter's price will result in a % .40 decrease (increase/decrease) in the number of Sputters demanded. Demand is therefore inelastic (elastic/unit elastic/inelastic). If the manufacturer wishes to raise total sales revenue from its Sputter model, it should raise (raise/lower) the price of the car. (2) The quantity of Good A increases by 10% when Good B's price increases by 15%. The cross-price elasticity of demand is .66 . These two goods must therefore be substitutes (substitutes/complements/independent). Give an example of two goods of this type: the two goods are alternatives – consumer is indifferent between them, i.e. butter and margarine, Fiji and Aquafina water, etc. (3) When Maria's income falls from \$50,000 to \$30,000, she increases purchases of Good A from 50 units a year to 100 units a year.
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