Question

3. There are a number of different demand elasticities that each tell a different story about how demand responds to changes in different economic variables. Explain what the own-price elasticity of demand, cross-price elasticity of demand, and income elasticity of demand of a good tell us about that good. Define any terms you use in your explanation. For example, if you are talking about an inferior good, explain what an inferior good is. (30 points)

4. Sunspot Canning Company cans fruits and vegetables. Its production possibility frontier is given in the following table. The price of a case if the fruit is $25.00 and the price of a case of vegetables is $33.33.

Cases of Canned Fruit	Cases of Canned Vegetables	MRPS
135,000	0	XXX
128,000	10,000
119,000	20,000
108,000	30,000
95,000	40,000
80,000	50,000
63,000	60,000
44,000	70,000
23,000	80,000
0	90,000

1. Calculate the marginal rate of product substitution. Show your work. (5 points)
2. Why does the company need to decrease the cases of canned fruit if it increases the production of canned vegetables? (5 points)
3. Using the marginal analysis framework, explain how the company will decide to increase the production of canned vegetables and decrease the cases of canned fruit. (10 points)
4. Using the marginal analysis you described in part c and the prices provided above, determine the profit-maximizing combination of cases of canned fruit and canned vegetables. (5 points)

Answer 1