Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
Answer: C
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Suppose the only two goods you care about in the world are French wine (x) and Cuban cigars (y) and your utility function is given by u(x,y)=xy. You have no income, and the only thing in the world you possess is a large box you have just inherited from your rich uncle who passed away last week (of liver and lung cancer.) You open the box, and much to your liking, you find it contains 9 bottles of fine French wine and 3 boxes of exquisite Cuban cigars. Currently, the wine sells for $1 per bottle, and the cigars sell for $9 per box. Just as you receive the inheritance, you read the headline: "President Lifts Embargo - Price of Cuban Cigars Falls to $4 per Box!" a. Determine the income (or wealth) and substitution effects of a decrease of the price of cigars from 9 to 4. (Assume
fractions of bottles and cigars can be bought.) b. Are cigars a normal or inferior good for you? c. How much would you have been willing to pay the President in order not to lift the embargo? What will be an ideal response?
A decrease in quantity demanded of a good is caused by
A) a decrease in income. B) a decrease in the price of a substitute. C) an increase in the price of the good. D) a change of tastes.
Stabilization policy is the name given to government economic policies designed to
a. stabilize the price level. b. shorten and/or prevent recessions. c. diminish unemployment. d. All of the above are correct.
An increase in the tariff on foreign-produced automobiles would most likely help
a. the domestic producers of automobiles. b. steel producers that sell most of their output to foreign producers of automobiles. c. workers in the foreign automobile industry. d. consumers looking for alternatives to domestic automobiles.