Question 1

Hank Schrader has his own geological business, They’re Minerals!, where he digs for precious rocks that

can be used for gifts. He is particularly interested in how elastic demand may be for his store’s products.

He learns that there are a few ways to label the demand.

a) Provide a brief description of elastic, inelastic, and unitary elastic demand. Also include how their

demand curves are shaped.

b) Provide two examples of goods or services (real or fictional) that you believe may fall into each

of these categories. Show your reasoning.

c) There are also two extreme cases of elasticity that were looked at in this chapter. Provide a brief

description of each, as well as, including how their demand curves are shaped.

d) Hank believes that his store’s products should be considered elastic goods, while his wife, Marie

argues that they are inelastic because “they are just rocks”. What determinants of demand

elasticity would you suggest Hank use in order to buttress his argument? Provide your reasoning.

Question 2

Walter White and Jesse Pinkman own and operate their own restaurant, Blue Sky. Suppose when they sell

their signature meal for $12, they sell 960 dishes. When they lower the price to $8, they now sell 1,920

dishes.

a. Calculate the price elasticity of demand using the midpoint method.

b. Is their good considered elastic, inelastic, or unit elastic? Provide your reasoning.

c. Based on the answer in (b), what should Walter and Jesse do in order to raise total revenue for

their restaurant and why?

Question 3

Gustavo Fring owns fast food restaurant, Los Pollos Hermanos, that competes against Walter and Jesse’s

restaurant. He wonders about the cross elasticity of demand for his restaurant’s food.

Suppose, on three different days, he takes different measures of cross elasticity of his signature meal

against his competitor’s, and he estimates three values: 4.5 on Monday, 0.8 on Tuesday, and -2.7 on

Wednesday.

a) What can he conclude about his product on each of these different days? Provide your reasoning.

Suppose that Fring is now interested in the income elasticity of demand for his products. Once again,

takes measures for three of his products. The restaurant’s chicken nuggets return an income elasticity of

-2.3, the chicken sandwich returns an income elasticity of 0.88, and the chicken salad returns an income

elasticity of 3.21.

b) What can he conclude about each of these menu items? Provide your reasoning.

c) What are the main similarities and differences between the price elasticity of demand, the cross

elasticity of demand, and the income elasticity of demand? Provide the full formula for each

using the variables and notation for each using the notation found in the lectures.

Question 4

All three businesses seen in the previous questions have to pay taxes but each of them is subjected to

different kinds of taxes.

Hank earned $137,821 in income last year, and had to pay $42,987 in taxes. Walt and Jesse earned

$278,123 in income last year, and had to pay $77,317 in taxes.

a) What kind of tax system are these businesses operating under? Provide your reasoning and

calculations.

In Gus’ case, he earned $782,481 in income last year and had to pay the government a fixed amount of

$225,000 in taxes.

b) What kind of tax system is his business operating under? Provide your reasoning and

calculations.

Question 5

Walt’s wife, Skyler, owns a car washing business, A1A Car Wash, and is provided with the details of her

business’ supply and demand curve in the graph below.