Problem Set 3
Elasticity
1.
Edsel consumes 50 bottles of beer per week. His price elasticity of demand for beer
. The price of beer doubles. How many bottles per week doe he consume
now?
2
.
,
−
=
b
p
b
x
E
2.
Madonna is spending $300 per week on eyeliner.
Her price elasticity of demand for
eyeliner is (
,
ee
x
p
E
) is .1. Suppose the price of eyeliner rises 10%.
How much does
she spend on eyeliner after the price change?
3.
Explain in words what means to say:
0
1
1
,
=
p
x
E
4.
Suppose a consumer is currently buying a positive amount of good 1. and her
elasticities are
.
a. Explain in words what this means
b. Does this make sense? Why or why not?
11
21
1
,,
,
...
0
n
xp
EE
E
==
5.
Suppose a consumer chooses between two goods, x
1
and x
2 ,
and has an income, I .
a. Suppose
Explain in words what this means.
b. Is it possible that
.
1
,
1
=
I
x
E
1
and
1
,
,
2
1
=
=
I
x
I
x
E
E
? Why or why not?
Comparative Statics of Demand
6.
Good 1 is a normal good, Good 2 is an inferior good. Using 3 budget lines and 2
indifference curves, illustrate the effect of an
increase in p
2
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 Winter '07
 Babcock
 Price Elasticity, indifference curves, X1, substitution effects, budget lines

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