Suppose you could buy shoes one at a time, rather
than in pairs. What do you predict the cross-price
elasticity for left shoes and right shoes would be?
2. Think back to a purchase that you made recently.
How would you describe your thinking before you made
that purchase?
3. The rules of politics are not always the same as the
rules of economics. In discussions of setting budgets for
government agencies, there is a strategy called “closing
the Washington Monument.” When an agency faces the
unwelcome prospect of a budget cut, it may decide to
close a high-visibility attraction enjoyed by many people
(like the Washington Monument). Explain in terms of
diminishing marginal utility why the Washington
Monument strategy is so misleading. Hint: If you are
really trying to make the best of a budget cut, should you
cut the items in your budget with the highest marginal
utility or the lowest marginal utility? Does the
Washington Monument strategy cut the items with the
highest marginal utility or the lowest marginal utility?
4. Income effects depend on the income elasticity of
demand for each good that you buy. If one of the goods
you buy has a negative income elasticity, that is, it is an
inferior good, what must be true of the income elasticity
of the other good you buy?
