1. Are the following statements true or false? Explain your answer.
a. The elasticity of demand is the same as the slope of the demand function.
b. The cross price elasticity will always be positive.
c. The supply of apartments is more inelastic in the short run than the long run.
d. The own-price elasticity of demand is – 2, meaning that if price increases by 1 unit, the quantity demanded will decrease by 2 units. The demand is inelastic.
2. Suppose the government regulates the prices of beef and chicken and sets them below their market-clearing levels. Explain why shortages of these goods will develop and what factors will determine the sizes of the shortages. What will happen to the price of pork? Explain briefly and graphically.
3. If a 3-percent increase in the price of corn flakes causes a 6-percent decline in the quantity demanded, what is the elasticity of demand?
4. Suppose the demand function for a product is given by Q=10-3P+Ps+4I, where P is the price of the product, Ps is the price of a substitute good, and I is consumer income. The price of the substitute good is $20.00 and income is $10.
a. Suppose P=$10.00. What is the price elasticity of demand? What is the cross-price elasticity of demand? What is the income elasticity of demand?
b. Suppose the price of the good, P, goes to $25.00. Now what is the price elasticity of demand? What is the cross-price elasticity of demand? What is the income elasticity of demand?
5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.