ECO 204
HOMEWORK 4

1.	Several years ago, the price of a piece of bubble gum rose from 1 cent to 2 cents.  
        This was a 100 percent rise in price.  In response to the price increase, the quantity 
        demanded of bubble gum fell but not by much.  We can conclude that:

	a.	the demand for bubble gum is perfectly elastic
	b.	the demand for bubble gum is elastic but not perfectly elastic
	c.	the demand for bubble gum is unit elastic
	d.	the demand for bubble gum is inelastic but not perfectly inelastic

2.	Sometimes coffee growers in Brazil have destroyed some or all of their coffee crop in 
        order to keep it from going to market.  The best explanation for such an action on the 
        part of the coffee growers is that:

	a.	they believed that there was international shortage of coffee
	b.	they believed that coffee was an inferior good
	c.	they believed that the demand for coffee was inelastic
	d.	they believed that they faced an inelastic supply curve for coffee

3.	Suppose that you are the director of the San Francisco Bay Area Rapid Transit Authority 
        and you want to raise revenue.  If a study estimates that the price elasticity of demand 
        for public transport services is 0.64, a reasonable strategy might be to:

	a.	lower price since quantity demanded will increase
	b.	leave prices alone since quantity demanded obviously is not very responsive to 
                price
	c.	buy new buses and subway trains because the new models are more appealing to 
                users
	d.	raise prices but quantity demanded will fall

4.	You have been told that the elasticity of demand for the shoelaces you sell is always 2.
        If you have a sale and lower the prices of the shoelaces by 50%:

	a.	You will sell 20% more shoelaces.
	b.	You will sell 50% fewer shoelaces.
	c.	You will sell 100% more shoelaces.
	d.	You will sell 25% more shoelaces.

5.	Suppose that you own an appliance store and that your main product is television sets. 
        If you reduce the price of televisions by 20 percent and the quantity demanded increases 
        by 15 percent, then you can conclude:

	a.	the demand for televisions is inelastic and your total revenue is falling
	b.	the demand for televisions is elastic and your total revenue is rising
	c.	the demand for televisions is inelastic and your total revenue is rising
	d.	the demand for televisions is elastic and your total revenue is falling
	e.	the demand for televisions is unit elastic and your total revenue is not 
                changing
 
6.	If beef and chicken have a high positive cross price elasticity of demand between them, 
        then we know that the goods are:

	a.	inferior
	b.	complements
	c.	normal
	d.	substitutes

7.	Suppose that goods X and Y are independent of each other in consumption.  Then the cross 
        price elasticity of demand when the price of good Y increases:

	a.	is positive
	b.	equals zero
	c.	is negative
	d.	is greater than zero