<p> 1</p><p>Chapter 5: Measurement and Interpretation of Elasticities</p><p>ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISES Exercises appearing on pages 82-84:</p><p>1. Demand curve shifts to the right as a result of successful advertising. Other determinants include (1) the price of Big Macs, (2) the price of substitutes and complements such as Burger King hamburgers and french fries, and (3) income.</p><p>2. a. Complements b. Ppancakes Psyrup</p><p>B</p><p>A</p><p>Qpancakes Qsyrup</p><p> c. The cross-price elasticity is negative.</p><p>3. Between A and B, the own price elasticity is elastic (-1.38). Between B and C, the own price elasticity if inelastic (-0.46). Between A and B, recommend a price decrease. Between B and C, recommend price increase to raise total revenue.</p><p>4. The elasticity is –1.3. The new price of $4.20 represents a 20 percent increase from the initial price of $3.50. Therefore, the percent change in quantity must be –26. If you are currently selling 1,500 burger platters, a 20 percent increase in price is associated with 1,110 platters.</p><p>5. The income elasticity between points A and B is 1.80. The income elasticity between points B and C is –1.57. Therefore the good is a normal good (actually a luxury item since its income elasticity exceeds one) between A and B, and the good is an inferior good between B and C.</p><p>6. Hamburger consumption will fall by 3 percent. They are complements since the cross-price elasticity of demand is negative.</p><p>7. Sales of Pepsi will rise by 3.5 percent. Thus, this retailer will sell 1,035 six packs of Pepsi per day as a result of the price of Coca-Cola increasing by 5 percent, assuming all other factors are invariant. Pepsi and Coca-Cola are substitutes because of the positive cross-price elasticity of demand. 2</p><p>8. -2/3=-0.667 9. Alfred Marshall 10. b 11. d 12. b 13. c 14. b 15. b 16. -0.4 17. (a) substitutes; (b) necessity (also a normal good)</p>