5 points 3a Are the following pairs of goods substitutes or complements

# 5 points 3a are the following pairs of goods

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[5 points] 3a. Are the following pairs of goods substitutes or complements? Indicate whether their cross-price elasticities are negative or positive. i. Bread and butter ii. Steak and mash potatoes iii. Tennis rackets and golf clubs iv. BMW automobiles and Mercedes-Benz automobiles [5 points] 3b. Explain why the elasticity of demand declines along a liner demand curve.
[5 points] 4a. If the price of gasoline is \$2.00 and the price elasticity of demand is 0.5, how much will a 10% reduction in the quantity placed on the market increase price? Will total spending on gasoline increase? If so, by what percentage? [5 points] 4b. Suppose a coffee shop located across the street from a large college campus typically has about 1,000 patrons per week who purchase coffee at the café. Assume the price for a cup of coffee is \$2.00. Suppose the café raises the price of a cup of coffee to \$2.10 and loses all of their customers. Compute the price elasticity of demand for coffee. What does this suggest about coffee? Draw the demand curve for coffee.

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• Fall '12
• ZhiyuWang