Question Briefly answer each of the questions below.

a. If the price of breakfast cereal falls from $6 to $3, and this leads to an increase in demand for milk from 30 to 40 quarts, what is the cross-price elasticity of breakfast cereal and milk? What does the cross-price elasticity of demand calculated indicate about how these two goods might be related?

b. Taxicab fares in most cities are regulated. Several years ago, taxicab drivers in Boston obtained permission to raise their fares 10 percent. They anticipated that revenues would increase by about 10 percent as a result. They were disappointed, however. When the commissioner granted the 10 percent increase, revenues increased but only by about 5 percent. What can you infer about the elasticity of demand for taxicab rides? What were taxicab drivers assuming about the elasticity of demand?
c. Average consumer incomes have decreased substantially due to poor economic conditions. In the market for Good X, the income elasticity of demand is positive. In the market for Good Y, the income elasticity of demand is negative. Explain what is happening to demand and what kinds of goods X and Y must be.

d. Your younger sister needs $500 to buy a new bike. She has opened a lemonade stand to make the money she needs. She is currently charging $1.00 per cup, but wants to adjust her price to earn the money faster. What is your advice to her? What assumption have you made about the price elasticity of demand in this market?