Imagine winning a radio trivia contest and being given the choice of three packages. Each package has two prizes. One package has a cellular phone and a beeper; one package has a cellular phone and a coupon for unlimited calls for a year; and one
package has a cell phone and a compact disc player. Unfortunately, the labels on the packages only give you the following information: the goods in Package A have a cross elasticity of 0.63, the goods in Package B have a cross elasticity of 0.00 . and the goods in Package C have a cross elasticity of –0.84. a . Which package will you choose if you want the cellular phone and the coupon for unlimited calls? Explain your answer b. Which package will you choose if you want the cellular phone and the beeper? Explain your answer.
a . Package C, because the cellular phone and the coupon are complements and the cross elasticity for
complements is negative.
b. Package A, because the cellular phone and the beeper are substitutes and the cross elasticity for
substitutes is positive. The cross elasticity for the goods in Package B is 0, indicating unrelated goods.
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The U.S. economy has had persistent inflation in recent decades. A possible explanation for the inflation is that
A) there have been decreases in the growth rate while aggregate demand has remained unchanged. B) growth in aggregate demand has been greater than growth in aggregate supply. C) there have been decreases in aggregate demand while aggregate supply has remained unchanged. D) there have been increases in the growth rate while aggregate demand has remained unchanged.
Other things equal, the multiplier effect associated with a change in government spending is:
A. the same as that associated with a change in taxes. B. equal to that associated with a change in investment or consumption. C. less than that associated with a change in investment. D. greater than that associated with a change in investment.