Quiz 4-
Question 1: CPI/Inflation-
You have the following information about the economy for Little Italy
|
Year
|
Price of Spaghetti
|
Price of Meatball
|
Price of Cannoli
|
|
2005
|
$4
|
$1
|
$2
|
|
2006
|
$6
|
$1
|
$2
|
|
2007
|
$6
|
$2
|
$2
|
The market basket of goods in Little Italy is one Italian dinner. The Italian dinner is comprised of:
1 order of Spaghetti, 2 Meatballs and 1 Cannoli (This is the market basket)
Using any base year you would like, calculate the inflation rate between 2006 and 2007. (Hint: the inflation rate is the same no matter what base year you use.)
Question 2: Elasticity-
You have the following information about Steak and Lobster.
|
Quantity of Steak
|
Quantity of Lobster
|
Price of Lobster
|
|
100
|
100
|
$20
|
|
75
|
80
|
$25
|
1. Find the cross price elasticity of demand for steak, using the arc-elasticity formula.
2. Are steak and lobster substitutes, complements or neither? (Circle your answer)
a. Substitutes
b. Complements
c. Neither
d. Not enough information
Question 3: Utility and Preferences-
You know the following information about an individual and their preferences between X and Y, and information about the market for goods X and Y.
MRSXY = -3Y/X
Price of X = $6
Price of Y = $1
Individual's Income = $240
a. Write down the equation for the individual's budget constraint. Be specific.
b. Determine the optimal combination of good X and Y that the individual buys.