the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were

0.6? What if it were 1? Explain your answer.

7. What would the gasoline price elasticity of supply mean to UPS or FedEx?

8. The average annual income rises from $25,000 to $38,000, and the quantity of bread consumed in a year

by the average person falls from 30 loaves to 22 loaves. What is the income elasticity of bread

consumption? Is bread a normal or an inferior good?

9. Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of

oranges falls by 3%. What will happen to the demand for apples?

Review Questions

10. What is the formula for calculating elasticity?

11. What is the price elasticity of demand? Can you explain it in your own words?

12. What is the price elasticity of supply? Can you explain it in your own words?

13. Describe the general appearance of a demand or a supply curve with zero elasticity.
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