AK4.2 - Rice University ECON 211 Fall 2009 Problem Set...

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Rice University ECON 211, Fall 2009 Problem Set 4 (100 points) Due on Friday, Sept. 26 Note that there are two parts to this assignment. You must hand in answers to questions in Part I. They will be graded. Questions in Part II will be discussed in the Tutorial sessions. You should not hand in answers for them. They will not be graded. Answers to all questions – in both Parts – will be posted on OwlSpace. Please keep your work neat. Make it easier for the graders! (Please type your answers whenever possible. Thanks.) Part I. This part will be graded. 1. (12 points) Answer the following questions : a. The price elasticity of demand is 1.90 for airline vacation travel and 0.80 for airline business travel. This information implies that (a) business travelers are more sensitive to price than vacation travelers. (b) vacation travelers are more sensitive to price than business travelers. (c) both business travelers and vacation travelers are very sensitive to price. (d) neither business travelers nor vacation travelers are very sensitive to price. Answer: b) b. Along a linear demand curve, which of the following statements is true? (a) Price elasticity of demand increases as you move up the demand curve, (the quantity demanded decreases) (b) Price elasticity of demand decreases as you move up the demand curve, (the quantity demanded decreases) (c) Price elasticity is constant along a linear demand curve. (d) Price elasticity of demand changes from positive values to negative values as you move down the demand curve (the quantity increases) Answer a)
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c. In a recipe for chocolate chip cookies, two of the ingredients are butter and eggs. Margarine may be used in place of butter. Based on this information, one would expect that (a) the price elasticity of demand for butter is greater than that for eggs. (b) the price elasticity of demand for butter is less than that for eggs. (c) the price elasticity of demand for butter is equal to that for eggs. (d) the price elasticity of demand for butter and eggs is necessarily unitary Answer a) d. Goods that are considered to be economic necessities, such as chicken and milk, tend to have an income elasticity that is (a) greater than one. (b) between zero and one. (c) between zero and –1. (d) less than –1. Answer b) e. Suppose the elasticity of supply for televisions is .57 in the short run and 1.98 in the long run. This implies that (a) the supply of TVs is more elastic in the short run than in the long run.
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