, panis own price elasticity of demand for donuts is -0.6, 1. Dan\'s own price e

Question

, panis own price elasticity of demand for donuts is -0.6, 1. Dan's own price elasticity of demand for donuts is -0.6, his cross price elasticity between donuts and coffee is -0.2, and his for donuts is 1.5. Based on this information, you predict that, if coffee prices fall 20%. Dan's donut % and his total expenditure on donuts will change by- consumption will change by 2. Consider Dan's demand curve for donuts, which are a normal good. In each case indicate if you would expect the demand curve to shift up, shift down, or remain the unchanged? 2a. The price of shoes falls 2b. The price of coffee increases 2c. The price of donuts rises 2d. Dan's income increases 2e. A price ceiling is put on donuts %and 3. If the elasticity ofsweater supply is 1.5 and price rises 20%, you predict that quantity will change by revenue will change by

Explanation / Answer

1.
% change in donut consumption = cross elasticity*% change in price of coffee
% change in donut consumption = -.2*(-20%) = 4%

% change in expenditure upon donut = 4% (since price of donut does not change, so increase in consumption, will be translated into the similar increase in expenditure.)

2.
A.
It will not affect the demand curve of donuts and it will be unchanged, as shoes are not related to donuts.
B.
Coffee and donuts are complementary goods, so demand curve will shift to the left and decrease due to increase in the price of coffee.
C.
Quantity of donuts demanded, will decrease, and the movement will be along the demand curve.
D.
It will cause, demand to increase and demand curve will shift to the rightward direction.
E.
Movement will be along the demand curve and demand will increase.

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