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microbook_3e-page77 - 67 when the price of wine falls from...

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Demand Curves in the Case where Wine is a Gross Substitute for Beer Once again, a decrease in the price of wine, increases the quantity of wine that I demand. Specifically, when the price is $2, I demand 25 wines, but when the price is $1, I demand 66 . 67. Once again, we can sketch out the demand curve by connecting those two points on a graph. Does that demand curve look more elastic to you than the ones in the previous cases? It should. The price elasticity of demand at a price of $2 is –1 . 5 and at a price of $1 it’s –1 . 33. Since wine is a gross substitute for beer, my consumption of beer falls from 25 to 16
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Unformatted text preview: . 67 when the price of wine falls from $2 to $1. Graphically, the demand curve for beer shifts inward when the price of wine falls (because I’m demanding less beer at a price of $2). The elasticity of demand for beer with respect to the price of wine equals 0 . 5 at a price of $2 per wine and it equals 0 . 667 at a price of $1 per wine. NB: In this case, the demand curve shift is larger (in absolute value) than the shift in the previous case. The difference in shift size is reflected in the larger cross price elasticities. Page 77...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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