Econ 100A PS2 - Department of Economics University of...

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Econ 100A-Spring 2010 Page 1 Problem Set 2 Department of Economics Spring 2010 University of California Prof. Woroch Economics 100A PROBLEM SET 2 Due: Thursday, February 18, 2008, 2:00 PM (in lecture) I. SHORT ANSWER QUESTIONS 1. For each of the following goods, explain whether you believe a price increase will lead to a large or small substitution effect and a large or small, positive or negative income effect: (i) common table salt, (ii) rent for a one bedroom apartment in Berkeley, (iii) a day ski pass to Northstar ski resort. Be sure to support your reasoning with real world examples. 2. A consumer must choose whether to buy a computer for $1,000 and $120 per year for internet access for three years or she can receive a $400 rebate on the computer but agree to pay $300 per year for three years for internet access. At what yearly interest rate will the consumer be indifferent between the two options? 3. “Uggs” have been around since World War I when aviators first worn a commercial version of the boots invented by Australian and New Zealand sheepherders. Several years ago, trend setters first began wearing them as well. Explain why Uggs’ snob appeal among these fashion pioneers ensured that at that time the market demand for Uggs would be more inelastic than when aviators worn them for warmth and comfort, and not style. Also explain why you would expect that, when Uggs became a fashion must-have more recently, the market demand would be more price elastic. II.
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Econ 100A PS2 - Department of Economics University of...

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