Author Question: Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey ... (Read 61 times)

nramada · **on:** Jun 30, 2018

Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey increases by 50 percent. The quantity consumed of herbal tea declines immediately by 25 percent. Everything else held constant, the:
a. cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are substitutes.
b. cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are complements.
c. cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are substitutes.
d. cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are complements.
e. cross-price elasticity of demand cannot be determined from the information provided.

Question 2

Use the law of diminishing marginal utility to explain why a pizza parlor might price pizzas in the following way: Buy one pizza for 12, get the second pizza for 6. Why not simply charge 9 per pizza instead?

asware1 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

b

Answer to Question 2

The second pizza gives less marginal utility than the first. The pizza parlor is trying to encourage consumers to buy the second pizza by charging a price that reflects its relatively lower marginal utility. If price is set equal to 9 per pizza, some consumers with low marginal valuations for a second pizza might elect not to purchase a second one. If enough customers elect not to purchase a second pizza at a price of 9, the pizza parlor might be worse off than when employing the buy one for 12, get the second pizza for 6 strategy.