1)Among the following groups- senior executives, junior executives, and students - which is the most likely to have the most and the least price elastic demand for membership in the Association of Business Professionals?

Senior executives are likely to have the least price elastic (or the most price inelastic) demand for membership in the Association of Business Professionals, while students are most likely to have the most price elastic (the least price inelastic) demand for this membership.

One of the factors that determines price elasticity of demand is the share of the good/service in a consumer's budget. We need to make two assumptions. The first is that this membership is not free and requires a fee (as most professional memberships do). The second is that students are the lowest paid group out of three and senior executives are the highest paid group.

If this is true, then out of three groups of people, the price of the membership would make up the highest share in the budget of students, then junior executives and then senior executives. Therefore, the most price elastic demand will be for those whose membership expenses take the largest share in the budget - the students, and the least price elastic - for those whose membership budget share is the lowest - senior executives.

 

2) For the Grinch, a three percent increase in the price of ham leads to a two percent increase the quantity of green eggs he consumes.

a) Are green eggs and ham substitutes or complements?

To answer this question, we need to use the idea of cross-price elasticity of demand (CPE), which shows how consumption of one good changes when the price of another good changes.

It is calculated as a ratio of a percentage change in quantity demanded of one good over a percentage change in the price of another good.

In this case, CPE of ham and green eggs is 2 divided by 3, which is 0.67. This is a positive number; therefore, green eggs and ham are substitutes.

If it was a negative number, they would be complements, and if it was equal to zero, they would be unrelated.

 

b) Explain to me in words what happens when the price of ham goes up?

Since green eggs and ham are substitutes, it means that when price of ham goes up, the Grinch's quantity demanded for ham goes down (based on the Law of Demand). He would likely substitute some of now more expensive ham with buying cheaper green eggs; therefore, his demand for green eggs would go up.

 

c) What about the price of green eggs?

Similarly, if the price of green eggs goes up, Grinch will be buying fewer eggs and shifting more towards consuming ham (thus demand for ham would go up). And if the price of green eggs declines, Grinch's demand for ham would decline too because he would be buying more green eggs.

 

3) Sam's income demand elasticity of ham is 1.4 and his income elasticity of demand for green eggs is -0.05.

a) Which good is normal and which is inferior?

A good is normal if its income elasticity of demand is greater than 0, and it is inferior if income elasticity of demand is less than 0.

Therefore, ham is a normal good and a luxury (since income elasticity of demand is not only greater than 0, but also greater than 1), and green eggs are an inferior good.

 

b) Explain to me in words what happens to consumption when income increases?

Since ham is a normal good, when Sam's income increases, he will be buying more ham; therefore, his demand for ham will go up.

Since green eggs are an inferior good, when Sam's income increases he will be buying fewer eggs, and his demand for green eggs will go down.