Suppose you could buy shoes one at a time, rather
than in pairs. What do you predict the cross-price

elasticity for left shoes and right shoes would be?

2. Think back to a purchase that you made recently.

How would you describe your thinking before you made

that purchase?

3. The rules of politics are not always the same as the

rules of economics. In discussions of setting budgets for

government agencies, there is a strategy called “closing

the Washington Monument.” When an agency faces the

unwelcome prospect of a budget cut, it may decide to

close a high-visibility attraction enjoyed by many people

(like the Washington Monument). Explain in terms of

diminishing marginal utility why the Washington

Monument strategy is so misleading. Hint: If you are

really trying to make the best of a budget cut, should you

cut the items in your budget with the highest marginal

utility or the lowest marginal utility? Does the

Washington Monument strategy cut the items with the

highest marginal utility or the lowest marginal utility?

4. Income effects depend on the income elasticity of

demand for each good that you buy. If one of the goods

you buy has a negative income elasticity, that is, it is an

inferior good, what must be true of the income elasticity

of the other good you buy?

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