Posted: March 17th, 2022
Suppose that many varieties of lettuce have been damaged in a particular season by disease. Only green leaf lettuce is unaffected. Typically, the demand for green leaf lettuce is fairly elastic, as red leaf, romaine, etc. can serve as close substitutes. However, this season, the price of green leaf lettuce goes up by 50%, while the quantity demanded drops by 5%. Calculate the elasticity of demand for green leaf lettuce. Is it elastic this season? Why or why not? Suppose that there is a large price increase for all types of salad dressing. What would you expect to happen to the demand for lettuce? Explain your answer using the term “cross price elasticity of demand”. Suppose average real incomes go up by 10% in one year. During that year suppose that: purchases at dollar stores decline by 2%, purchases of dishwashing liquid soap increase by 2%, and purchases of new automobiles increase by 12%. Using the terminology of income elasticity of demand, discuss which of these is likely an inferior good, normal good, or even closer to a luxury good.
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