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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.
a. If the price of ham is equal to the price of cheese, show that the own-price elasticity of demand for ham is -0.5 and that the cross-price elasticity of demand for ham with respect to the price of cheese is also -0.5.
b. Explain why the results from part (a) reflect only income effects, not substitution effects. What are the compensated price elasticities in this problem?
c. 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.
d. Explain how this problem could be solved intuitively by assuming this person consumes only one good—a ham-and-cheese sandwich.
May 18 2020 View more View Less
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