Question

assuming harmburger has a negative income elasticity

rs/jrbab/Downl... 1 of 2 E V Draw Erase 1. Elasticity (A) Assume hamburger has a negative income elasticity. Given this assumption, if income falls, what do you expect to happen to the price of hamburger and the quantity of hamburger sold? Why? Explain in words and graphically. (B) If the price elasticity of demand for gasoline is 0.3 and the current price is $3.20 per gallon, what rise in the price of gasoline will reduce its consumption by 10 percent? 2. Consumer Surplus and Producer Surplus Explain in words and graphically how consumer surplus, producer surplus and total surplus change when the minimum wage is removed. Assume the minimum wage is above the free market price. In your explanation, please interpret the components of the changes in consumer surplus, producer surplus and total surplus. In other words, what do these components represent? For additional points, what happens if the minimum wage is set below the free market price? 3. Suppose the demand curve for a product is given by Q = 300 - 2P+ 41, where I is average income measured in thousands of dollars. The supply curve is Q = 3P - 50. a. If I = 25, find the market clearing price and quantity for the product. b. If I = 50, find the market clearing price and quantity for the product.

Answer 1

A. An increase in income will decrease aggregate demand and shift the demand curve of hamburger to left leading to a decrease in equilibrium price and equilibrium quantity.

whereas when income decreases, then it will increase the demand for hamburger And it will increase the demand and shift the demand curve to the right leading to an increase in equilibrium price and quantity

price and quantity both increases.

b. Elasticity=%change in Quantity/%change in price

thus % change in price required=10/0.3=33.33 Thus price must rise by 33.33%

Thus new equilibrium price=1.3333(3.2)=4.26665