Check Your Understanding

1. Question

   In each of the following cases, state whether the income effect, the substitution effect, or both are significant. In which cases do they move in the same direction? In opposite directions? Why?

   1. Orange juice represents a small share of Clare’s spending. She buys more lemonade and less orange juice when the price of orange juice goes up. She does not change her spending on other goods.

   2. Apartment rents have risen dramatically this year. Since rent absorbs a major part of her income, Delia moves to a smaller apartment. Assume that rental housing is a normal good.

   3. The cost of a semester-long meal ticket at the student cafeteria rises, representing a significant increase in living costs. As a result, many students have less money to spend on weekend meals at restaurants and eat in the cafeteria instead. Assume that cafeteria meals are an inferior good.

2. Question

   The price of strawberries falls from $1.50 to $1.00 per carton, and the quantity demanded goes from 100,000 to 200,000 cartons. Use the midpoint method to find the price elasticity of demand.

3. Question

   At the present level of consumption, 4,000 movie tickets, and at the current price, $5 per ticket, the price elasticity of demand for movie tickets is 1. Using the midpoint method, calculate the percentage by which the owners of movie theaters must reduce the price in order to sell 5,000 tickets.

4. Question

   The price elasticity of demand for ice cream sandwiches is 1.2 at the current price of $0.50 per sandwich and the current consumption level of 100,000 sandwiches. Calculate the change in the quantity demanded when price rises by $0.05. Use Equations 46-1 and 46-2 to calculate percent changes and Equation 46-3 to relate price elasticity of demand to the percent changes.