Please answer the following 2 multiple-choice questions: Choose the correct answ

Question

Please answer the following 2 multiple-choice questions: Choose the correct answer and discuss why that answer is correct 1. Last month, sellers of Good Y took in $100 and sold 50 units of Good Y. This month sellers of Good Y raised their price, took in $120 and sold 40 units of Good Y. At the same time, the price of Good Xstayed the same, but sales of Good X increased from 20 units to 40 units. What can we conclude about Goods X and Y? (a) They are substitutes and have a cross-price elasticity of 0.60. (b) They are substitutes and have a cross-price elasticity of 1.67. (c) They are complements and have a cross-price elasticity of 0.60. (d) They are complements and have a cross-price elasticity of 1.67. 2. Assume that the demand and supply curves for cars are elastic. If the government imposes a $500 tax on the buyer of each car, what can we assume will happen to the price of a car? (a) The equilibrium price at which a car is bought will decrease by less than $500. (b) The equilibrium price at which car is bought will decrease by exactly$500. (c) The equilibrium price at which car is bought will decrease by more than $500. (d) The equilibrium price of a car will not change, since both curves are elastic.

Explanation / Answer

1) Solution: They are substitutes and have a cross elasticity of 1.67

Explanation: % change in quantity demanded of X/ % change in Price of Y = (20/10) / (120/100) = 1.67

Since it is positive and less than 1 thus are substitutes

2) Solution: equilibrium price of a car would decrease by less than $500

Explanation: An imposition of tax will reduce the price lesser than $500 as the demand and supply curves for cars are elastic

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