Alison consumes only tea and cookies and consumes them only in equal proportions. What is Alison's income elasticity of demand for tea?
What will be an ideal response?
First, derive the demand equation using the budget constraint and the fact that T = C. Then
T = I/(pt + pc)
Using calculus,
?T/?I = -I/(pt + pc)2
The income elasticity is:
?T = -I/(pt + pc)2 × (I/T) = -1
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A) an individual driving carelessly after buying a comprehensive insurance policy for a Ford Pinto. B) the IMF bailing Mexico out of a financial crisis, with promises to do the same for other nations that might face financial problems. C) making regular visits to your doctor because you know that you have full healthcare coverage. D) the requirement of banking institutions that owners invest a substantial portion of their own capital in their bank. E) membership in FDIC (Federal Deposit Insurance Corporation) by your local bank.
Under perfect competition, entry of new firms into the market in the long run tends to:
a. raise the aggregate supply. b. raise the level of profit of the existing firms. c. raise the aggregate demand for goods. d. reduce the degree of competitiveness in the market. e. reduce the market power of the existing firms.