1) Pierre, a Frenchman with a weakness for champagne, recently received a raise. His income rose from $25,000 to $40,000 a year. As a result, Pierre's consumption of Andre Champagne decreased from 15 bottles a week to 5 bottles a week. Calculate Pierre's income elasticity of demand for Andre Champagne. What might be the reason for the decrease in demand?
2) Your friend the grocer lowered the price of chicken from $2.50/pound. to $1.75/pound. He was dismayed to see that the quantity demanded of hamburger decreased from 80 pounds to 64 pounds per week. Since you are the neighborhood economist, he comes to you for an explanation. Respond by calculating cross elasticity of demand. Then explain what happened to the grocer’s sales.