Suppose that a person regards ham and cheese as pure complements – he or she will always use one slice of ham in combination with one slice of cheese to make a ham and cheese sandwich. Suppose also that ham and cheese are the only goods that this person buys and that bread is free.

If , show that own price elasticity of demand for ham is -0.5 and that the cross price elasticity of demand for ham with respect to price of cheese is also -0.5.

Explain why the results from part (a) reflect only income effects, not substitution effects. What are the compensated price elasticities in this problem?

Use the results from part (b) to show how your answers to part (a) would change if a slice of ham cost twice the price of a slice of cheese.

Question 3: Suppose for a country all goods and services are classified into three groups (1) Durable (D) goods (2) Non-durable (N) goods and (3) Services (S). From the household consumption survey, we know that their respective shares in total consumption are S _D =0.3, S _N =0.45, S _S =0.25.

1. If the income elasticity of demand for Durable goods (mainly housing) is 1.2 and for Non-Durable goods (food, clothing) is 0.50, what is the income elasticity of demand for Services?

2. If you know that the compensated own-price elasticity of demand for durable goods is -1.0, for non-durable goods is -0.6, and the compensated own-price elasticity of demand for services is -1.2. What is the uncompensated own-price elasticity of demand for these three goods?

3. If you know from part b that the compensated own-price elasticity of demand for durable goods is -1.0 and you also know that the compensated cross-price elasticity for durable goods with respect to the prices of non-durable goods is 0.45, what is the compensated cross-price elasticity of demand for durable goods with respect to the price of services?

4. Using the information from part c, what is the compensated cross-price elasticity of demand for non-durable goods with respect to the price of durable goods? What is the compensated cross-price elasticity of demand for services with respect to the price of durable goods?

5. What is the marginal propensity to consume Durable goods, Non-durable goods, and Services?

6. If you know that the own-price elasticity of demand of non-durable goods is -0.6 (given in part b) and the compensated cross-price elasticity of non-durable goods with respect to durable goods is found by your answer to the first part of part d, what is the compensated cross-price elasticity of demand for non-durable goods with respect to the price of services?