Question

1. Consider the following elasticity information for three goods.

Elasticity Good A Good B Good C

Own-Price -0.2 -3.0 -1.5

Income -0.5 2.0 0.5

Cross-price with A .2 -0.1

Cross-price with B 0.2 -0.3

Cross-price with C -0.1 -0.3

a. What would happen to desired purchases of good A when prices rise by 20%? What would happen in the market for good C when good A's price changes?

b. Which goods are normal? Which are inferior? Why?

c. Which pairs of goods are complements? Which are substitutes? Why?

d. For which goods would price increases result in lower total expenditures on that good? Why?

2. Consider the following production data

Labor Hrs Output (lbs

1 2

2 5

3 9

4 14

5 17

6 19

a. Calculate the marginal product of labor for all hours of labor.

b. For which values of labor hours do you see declining marginal product of labor?

Answer 1

1)

a) The purchases of Good A would decrease by 20*0.2 = 4%

In the market for Good C, the consumption of C will decrease by 20*0.1 = 2%

b) Good B and C are normal goods as income elasticity is positive and Good A is an inferior good as income elasticity is negative

c) Goods A and B are substitutes as cross elasticity is positive and Goods A and C and B and C are complements as cross elasticity is negative.

d) Price increase will lower the expenditure for Good A

2)

L	Q	MP
1	2	2
2	5	3
3	9	4
4	14	5
5	17	3
6	19	2

Declining marginal product is from 5th to 6th labor