Why is elasticity of demand greater for goods that are a large share of a consumer's budget?
What will be an ideal response?
The greater the share of a consumer's budget accounted for by a good, the greater the elasticity of demand because the real income effect is greater. An increase in the price of a good that accounts for a relatively large share of the budget means that the consumer would have to significantly reduce spending on other goods. It is also more likely the consumer will also cut back on consumption of the good itself too.
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If the economy is at point 1 in Figure 13.1 and the central bank issues a credible statement that it can and will cause inflation to rise, what happens next?
A) the economy moves to point 2 B) the economy remains at point 1 C) the economy moves to the left along the AS curve D) the AS curve shifts down, causing both output and inflation to decline E) the AS curve shifts up, causing both output and inflation to rise
After getting an A on your economics exam, you decide to go to your favorite Mexican restaurant to celebrate. You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas. Use the rule of equal
marginal utility per dollar to determine which one to purchase: (a) the chimichanga for $8 which gives you 120 units of utility, or (b) the enchiladas for $15 which gives you 195 units of utility? Assume your budget is large enough to purchase either item. What will be an ideal response?