1. In the past year, the price of dry-cleaning solvent doubled. More than 4000 dry cleaners across the country disappeared as budget-conscious consumers cut back. This year the price of hangers used by dry cleaners is expected to double.
a. Explain the effect of rising solvent prices on the market for dry cleaning.
b. Explain the effect of consumers becoming more budget conscious along with the rising price of solvent on the price of dry cleaning.
c. If the price of hangers does rise this year, do you expect additional dry cleaners to disappear? Explain why or why not.

2. In January of 2007 online movie rental service Netflix introduced a new feature to allow customers to watch movies and television series on their personal computers. Netflix competed with many video rental retailers, which added online rental services to their in-store rental services in response.
a. How did online movie viewing influence the price elasticity of demand for in-store movie rentals?
b. Would the cross elasticity of demand for on-line movies and in-store movie rentals be negative or positive? Explain.
c. Would the cross elasticity of demand for on-line movies with respect to high speed internet service be negative or positive? Explain.

3. “The high price of gasoline is hurting our economy” said Mark Kirsch, a trucker in April of 2008 when Gasoline prices were at all-time highs due to $100/bbl. + oil prices. “Its hurting middle class people.”
Explain to truck drivers why a government imposed cap on the price of gasoline would hurt the middle-class more than the high price of gasoline hurts.

4. Two gas stations stand on opposite sides of the road. Neither has to look across the highway to know when the other changes its price. When one station raises its price the others pumps are
busy. When one station lowers its price, there is not a car in line at the other station.
a. In what type of market do these gas stations operate? What determines the price of gasoline and the marginal revenue from gasoline?
b. Describe the elasticity of demand that each of these gas stations faces.
c. Why does each of these gas stations have so little control over the price of the gasoline it sells?

5. Explain how widespread increases in living standards influences total utility? How do total utility and marginal utility from consumption change over time?

1. In the past year, the price of dry-cleaning solvent doubled. Mor...