Question

Question 1-True/False and Explain (otherwise zero) 5. If, in Pottsville, the legal age for cigarettes is increased from 19 to 21, the price of cigarettes will decrease and those 21 and older will consume more but total consumption (i.e. sales) will decrease. Price Qty True or false 6. As we ago, our tastes change. For example, Bob now loves bourbon whiskey more than 20 years ago. Therefore, his indifference curve is now steeper than it was 20 yours ago. Bourbon 2000 Beer True or false 7. The firm that you work for has calculated the cross elasticity between your product (X) and product Y to be -2.0. If firm Y decreases their price by 10%, you can expect your sales to increase by 20% True or false

Answer 1

5) True. The sales will decrease as the legal age in increased because of fall in demand. The older ones may consume more due to fall in price. However, the consumption by the older ones are not expected to match the fall in price because of the demand curve is not perfectly elastic. Thus there will be a relative fall in the sales.

6) False. A steeper indifference curve would imply that for a unit change in Bourbon whiskey, a small amount of change in Beer is required. However when the preferences now have changes in favour of Bourbon, the consumer must get a large increase in beer consumption to reduce the consumption of Bourbon by one unit. Thus the stamen is false and the Indifference curve must be flatter now than it was 20 years before

7) Elasticity between X and Y = % change in QTY of X/ % change in Price of Y.

% change in Price of Y = -10%

% change in QTY X = elasticity *% change in price Y

%change in QTY X = -2 *(-10%) = 20%

Thus the statement is true.

8) False. The goods are substitutes when the indifference curves are straight lines with negative slope. The indifference curves here are beautiful convex curves. Thus the goods are not substitutes.