Question

1. The cross-price elasticity of beer and pizza is -0.8. An increase in the price of beer will:

(a) Decrease the demand for pizza

(b) Increase the demand for pizza

(c) Increase the supply of pizza

(d) Decrease the supply of pizza

2. At 10 units of output, a firm's marginal cost and average total cost each equal $50. Therefore, assuming 'typically' shaped cost curves, at 11 units of output:

(a) Its marginal cost is less than $50 and its average total cost is greater than $50

(b) Its marginal cost and average total cost are each less than $50

(c) Its marginal cost is greater than $50 and its average total cost is less than $50

(d) Its marginal cost and average total cost are each greater than $50

Answer 1

Q1) The cross price elasticity of demand of beer and pizza is -0.8 which is negative. Since, the cross price elasticity is negative, it shows that the two goods are complements or are complementary goods that is both the goods are consumed together and increase in the price of one good will decrease the demand of the other good or decrease in the price of one good will increase the demand for the other good. In this case, an increase in the price of beer will decrease the demand for pizza.