Microeconomics Chap 19 (self-test)
Under what conditions would a per-unit tax placed on the sellers of computers be fully paid by the buyers of computers?
under the condition that demand for computers is perfectly inelastic or that the supply of computers is perfectly elastic.
Why will government raise more tax revenue if it applies a tax to a good with inelastic demand than if it applies the tax to a good with elastic demand?
tax revenue is equal to the tax times the quantity sold. if demand is inelastic, then the higher price brought about by the tax will result in smaller cutback in quantity sold.
Identify what happens to total revenue as a result of each of the following: a) price rises and demand is elastic
total revenue falls
c). price rises and demand is unit elastic
total revenue remains constant
d). price rises and demand is inelastic
total revenue rises
e). price falls and demand is elastic
total revenue rises
Alexi says, "when seller raises his price, his total revenue rises." what is Alexi implicitly assuming?
Alexi is implicitly assuming that demand is inelastic. If, however, she is wrong and demand is elastic, then a rise in price will actually lower total revenue.
Price elasticity of demand is predicted to be higher for which good of the following combinations of goods? Explain your answers. a). dell computers or computers
Dell computers
On Tuesday, the price and quantity demanded are $7 and 120 units, respectively. Ten days later, the price and quantity demand are $6 and 150 units, respectively. What is the price elasticity of demand between the $7 and $6 prices?
E(d) = 1.44
b). heinz ketchup or ketchup
Heinz ketchup
What does a price elasticity of demand on 0.39 mean?
If there is a change in price, the quantity demanded will change (in the opposite direction) by 0.39 times the percentage change in price. For example, if the price rises 10 percent, then the quantity demanded will fall 3.9 percent. If the price rises 20 percent, then the quantity demanded will fall 7.8 percent.
Explain your answers.
In all three cases, the good with the higher price elasticity of demand is the more specific of the two goods, therefore, it has more substitutes.
If good X has 7 substitutes and demand is inelastic, then if there are 9 substitutes for good X, will demand be elastic? Explain your answer.
No. Moving from 7 to 9 substitutes doesn't necessarily change demand from being inelastic to elastic. It simply leads to a rise in price elasticity of demand, ceteris paribus. For example, if price elasticity of demand is 0.45 when good X has 7 substitutes, it will be higher when there are 9 substitutes, ceteris paribus. Higher could be an elasticity of 0.67. If this is the case, demand is still inelastic (but less than before).
c). perrier water or water
Perrier water
What does perfectly inelastic supply signify?
a change in price does not change the quantity supplied
What does income elasticity of demand of 1.33 mean?
an income elasticity of demand of 1.33 means that the good in question is a normal good, and that it is income elastic; that is, as income rises, the quantity demanded rises by a greater percentage. in this case, quantity demanded rises by 1.33 times the percentage change in income. thus, if income rises by 10 percent, the quantity demanded of the good will rise by 13.3 percent.
b) price falls and demand is inelestic
total revenue falls
