Assignment for 2:35 - 4:05 only

Assignment (one whole yellow paper)

Compute the appropriate elasticity of the following problems:

1. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)

2. Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of Ho-Ho's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?

3. If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price elasticity of demand is _______ .