solution

Use the formulas for elasticity to answer the following questions.

a. When Mariba’s income rises by 10 percent, her expenditures on carrots rise 12 percent. What is Mariba’s income elasticity of demand for carrots? Are carrots, for her, a normal or an inferior good?

b. Suppose that the price elasticity of demand for milk is 0.6. If a grocer raises the price of milk by 15 percent, by what percentage will milk sales decrease as a result of the price increase? Will the grocer’s revenue from milk sales go up or down?

c. Suppose that the price elasticity of supply for paper is 1.5. You notice that the quantity of paper supplied decreases by 6 percent as the result of a change in the price of paper. Determine by what percentage the price of paper must have declined.