Unformatted text preview: to wheat? Explain why. (6 pts)
For complements, the sign of cross-price elasticity is negative, whereas for
substitutes, the sign of cross-price elasticity is positive. Thus Rice is substitute,
whereas Seafood and Fruit are complements
c. Suppose you, a seller of wheat, raise its price. Would you increase the price of
wheat? Answer it after analyzing the effect of price increase on total revenue,
based on the information from Table1. Explain. (6 pts)
Because the price elasticity of demand for wheat is -0.73, which is inelastic,
increase in price would increase TR, which is P*Q. Thus increase the price.
3. Suppose Jerry earns $40,000 this year and his annual income will be $44,000 next year. a. What is the present value (PV) of his future income when the interest rate is 10%?
Show your work. (5 pts)
PV = 44000/1.1=40000
b. Using current consumption (C1) and future consumption (C2) graph (x-axis: C1,
y-axis: C2) draw Jerry’s budget constraint when the interest rate is 10%. Clearly
mark your graph. What is the slope of the budget constraint? (7 pts)
C2 = 88000 – 1.1C1 ; The slope = -1.1
c. If the interest rate decreases to 5%, make changes in Jerr...
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This document was uploaded on 02/06/2014.
- Spring '14