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Chapter%204%20Practice%20B - Chapter 4 Practice B 1...

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Chapter 4 Practice B 1. Consider the following: a. Can a good have both a downward-sloping Engel curve and a downward-sloping demand curve? Why or why not? b. Can a good have both an upward-sloping Engel curve and an upward-sloping demand curve? Why or why not? 2. Suppose the demand curve for bus travel is downward sloping, and the income elasticity of demand for bus travel is negative. a. Design an indifference curve / budget constraint diagram showing the substitution and income effects created when the price of bus travel falls. In your diagram, place bus travel on the horizontal axis and all other goods on the vertical axis. b. How can you tell from your diagram that the income elasticity of demand for bus travel is negative? Explain. 3. Suppose that the local utility regulators have recently approved an increase in the price of electricity from 10¢ per kilowatt-hour to 10.5¢ per kilowatt-hour. The long-run price elasticity of demand for electricity is estimated to be -1.2.
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