1- First question
Answer the following questions. All answers must be typed.
Suppose coal burning firms are emitting excessive pollution into the air. Suggest two ways the government can deal with this market failure.
If I neglect or refuse to cut the grass on my front lawn, what are the externalities involved? Suggest two ways the government might deal with this issue.
Why does the government subsidize the purchase of college educations, but not the purchase of hamburgers?
Which of the following are public goods? Why?
ELASTICITY OF DEMAND
Pick ten (10) specific items of clothing (“white, button-down, fitted, frilly blouses, moderately priced” and not “blouses”) that you regularly purchase and/or have purchased in the last thirty days. [Not shoes, jewelry, or handbags.] For each of the items, describe the item, and then answer the following three questions, explaining your answers in detail. (You should have thirty answers. Please type your answers or write very clearly.)
What is your price elasticity of demand for each of these items of clothing? Visualize price going up 25 percent, and your response. [Your choices are: perfectly elastic, very elastic, mildly elastic, unitary elastic, inelastic, very inelastic, perfectly inelastic.] Explain why? Be specific in your explanation.
What is your income elasticity of demand for each item of clothing? Visualize your income going up 25 percent, and your response. [Your choices are: high income elastic, unit income elastic, low income elastic, zero income elastic, negative income elastic.] Explain why? Be specific.
What is your cross price elasticity of demand for each item of clothing? Pick another, related good (some substitutes and some complements) and visualize its price going up 25 percent, and your response with your original item. [Your choices are: perfectly elastic (positive number), very elastic (large positive number), elastic (small positive number), zero cross elastic, inelastic (small negative number), very elastic (large negative number), perfectly elastic (negative number).] Explain why? Be specific.
Item # 1: “white, button-down, fitted, frilly blouses (that I wear to work regularly)
price elasticity of demand. If the price of white, button-down, frilly blouses went up by 25%, I would buy less of these blouses over the course of the year, but most likely my demand would go down by less than 25%. This is because I wear these blouses almost every day because they are a good combination of being feminine and making me look pretty, yet still appear very professional and business-like. So my demand for this product would be inelastic.
income elasticity of demand. If my income went up by 25%, I would probably use my extra income to buy other types of more casual clothing and not extra white, button-down, frilly blouses, of which I have many. So my income elasticity of demand for this product is close to zero,
cross-price elasticity of demand. If the price of pink, blue and other colored button-down, frilly blouses went up by 25%, then my demand for white, button-down, frilly blouses would go up considerably because the two goods are close substitutes. White is my ‘fall-back’ color that matches all my business suits. While I would not like to only wear white blouses, I already have some colored blouses in my wardrobe, that I can mix in. So my cross elasticity of demand is very elastic (with a positive number.)
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