QUESTION TWO (20 MARKS)

When lettuce prices doubled, from $1.50 per head to about $3.00, the reaction of one consumer was quoted in a newspaper article: " I will not buy [lettuce] when it's $3 a head," she said, adding that other green vegetables can fill in for lettuce. "If bread were $5 a loaf, we'd still have to buy it. But lettuce is not that important in our family."

For this consumer's household, which product has the higher price elasticity of demand: bread or lettuce? Briefly explain (3 Marks)

Is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative for this consumer? Briefly explain. (3 Marks)

Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the Economist magazine contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of the price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain. (6 Marks)

Explain how the events listed in (i) to (iv) would affect the following costs at Mawing Airlines:

1. Marginal cost

2. Average variable cost

3. Average fixed cost

4. Average total cost

Mawingo signs a new contract with the Transport workers Union that requires the airline to increase wages for its flight attendance. (2 Marks)

The government starts a levy a$ .20-per passanger carbon emissions tax on all commercial air travel. (2 Marks)

Mawingo declines on an across-the-board 10 percent cut in executive salaries (2 Marks)

Mawingo decides to double its television advertising budget. (2 Marks