14-18: Substitution Effect Discuss the case of Pete and how the income
and substitution effects alter his buying
As a college student, he prefers a less
expensive substitute deodorant, because it
demands less of his total income.
Ask students: When Pete graduates and gets a
high-paying job, will he worry as much about
the cost of deodorant?
Do you expect him to switch back to Old
Spice? Why or why not?
14-19: Cross-Price Elasticity Just like Kendra, many people buy products
without considering the price of necessary
Kendra is caught in a cross-elasticity trap,
because her demand for one product generated
demand for the other.
Group activity: Brainstorm a list of other
products that exhibit cross-price elasticity.
14-20: Check Yourself 1 Fixed costs are those costs that remain
essentially at the same level, regardless of
any changes in the volume of production.
While variable costs are those costs,
primarily labor and materials, that vary
with production volume.
2 To determine the break-even point in units
mathematically, we must introduce one
more variable, the contribution per unit,
which is the price less the variable cost per
unit. Therefore, the break-even point
becomes Break-even point (units) = fixed
costs/contribution per unit.