Alison consumes only tea and cookies and consumes them only in equal proportions. What is Alison's income elasticity of demand for tea?
What will be an ideal response?
First, derive the demand equation using the budget constraint and the fact that T = C. Then
T = I/(pt + pc)
Using calculus,
?T/?I = -I/(pt + pc)2
The income elasticity is:
?T = -I/(pt + pc)2 × (I/T) = -1
You might also like to view...
If the price elasticity of demand for U.S. automobiles is higher in Europe than it is in the United States, and transport costs are zero, a price-discriminating monopolist would charge
A) the same price for autos in the United States as in Europe. B) a lower price for autos in the United States than in Europe. C) a higher price for autos in the United States than in Europe. D) a less profitable price for autos in the United States than in Europe.
Suppose an American worker can make 50 pairs of gloves or grow 300 radishes per day. On the other hand, a Bangladeshi worker can produce 100 pairs of gloves or grow 200 radishes per day. The opportunity cost of one pair of gloves is:
A. 6 radishes for the United States and 2 radishes for Bangladesh. B. 60 radishes for the United States and 20 radishes for Bangladesh. C. 1/6 radishes for the United States and ½ radishes for Bangladesh. D. 6,000 radishes for the United States and 2,000 radishes for Bangladesh.
In order to bring a market to its efficient outcome when a negative externality is present, the government could:
A. limit total consumption to the efficient quantity. B. tax the parties involved in the market the value of the external cost. C. limit the price to the efficient level. D. Any of these would bring the market to its efficient level.
Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80.Table 10.1Spending CyclesChange in this Cycle's Spending and IncomeCumulative Increase in Spending and IncomeFirst-cycle spending$325$325Second-cycle spending________________Third-cycle spending________________In Table 10.1, what is the change in the second cycle of spending resulting from the higher initial investment?
A. $325. B. $1,625. C. $260. D. $65.