econ 302 ass 7

# econ 302 ass 7 - Christine Drews Econ 302 Toossi Section 2...

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Econ 302 – Toossi Section 2 Problem set 7 5/12/2009 Questions for Review 4. Long-term heavy drinkers are still highly responsive to increases in the price of alcohol. Because heavy drinkers drink primarily out of habit, and not because of rational decisions regarding price, their substitution effect in response to price changes is very small. However, even if the substitution effect was zero, the income effect still remains. The budget share devoted to alcohol also tends to be very large among these heavy drinkers. The result, then, is that the income effect of a substantial increase in prices of liquor forces many heavy drinkers to consume less. They can no longer afford consumption levels previously held. 6. The cost of the increasing energy prices is still less than the cost of convenience lost in taking the bus. More people are willing to pay a little higher price for the energy costs in return for the convenience that the car gives. This is not always going to be the case, though. There will come a time when the energy prices rise so much that the cost of paying more for energy will outweigh the cost of convenience lost, and more and more people will start taking the bus. Problems 3. P = 4 – Q/2 1 = 4 – Q/2 2 = 4 – Q/2 -3 = -Q/2 -2 = Q/2 Q = 6 Q = 4 If the prices rise from \$1/pint to \$2/pint, then Larry will be forced to consume less pints of strawberries per week. He will now only be able to afford 4 pints per week, as opposed to the 6 pints per week he previously was able to afford. 4.

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## econ 302 ass 7 - Christine Drews Econ 302 Toossi Section 2...

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