Practice 5.3 Elasticity and Pricing

The price of a pair of shoes is $30, not including 10% tax. A consumer pays $31.50 for the shoes after the tax is applied. On whom does the tax burden rest? Select the correct answer below: The tax burden is shared. The producer only. The consumer only. The government.

The tax burden is shared. If prices adjust by a fraction of the tax, the tax burden is shared. In this case, the shoes adjust by $1.50, which is a fraction of the $3 tax.

Consider a market where demand is relatively more inelastic than supply. If the price of a major input increases, how will this increase in input costs be split between producers and consumers? Yes that's right. Keep it up! Producers will face a greater portion of the burden of the cost increase than consumers. Consumers will face a greater portion of the burden of the cost increase than producers. Consumers and producers will face an equal burden of the cost increase. Consumers or producers could both face either a higher or lower burden of the cost increase.

Consumers will face a greater portion of the burden of the cost increase than producers. When demand is relatively inelastic, increases in production costs cause much higher prices but very little change in equilibrium quantity. As a result, consumers will bear more of the burden of increased input costs, while producers bear a much smaller portion of the burden. This is because consumers with relatively more inelastic demand are less responsive to changes in price and thus more willing to accept increases in price.

If the price elasticity of demand is such that a 3% rise in prices leads to a 1% decrease in quantity demanded while the price elasticity of supply is such that a 3% rise in prices leads to a 5% increase in quantity supplied, then which of the following will be a consequence if a key input cost rises? Select the correct answer below: Producers face greater costs than consumers from production savings. Increases in key input costs are more detrimental to producers than consumers. Increases in production costs must be absorbed by producers. Increases in production costs can largely be passed along to consumers.

Increases in production costs can largely be passed along to consumers. When demand is relatively more inelastic than supply, then increases in production costs can be pushed onto consumers rather than being absorbed by producers. This is because consumers are less responsive to changes in price and are therefore more willing to accecpt higher prices.

A certain product has a price elasticity of supply of 3.0 and demand has a price elasticity of 0.1. If a tax were placed on the product, what is most likely to happen? Please select two correct answers. Select all that apply: Sellers will bear significantly less of the tax burden when compared with consumers. Consumers will bear a disproportionately higher amount of the tax burden when compared with producers. Consumers and sellers will bear an equal burden. Sellers will bear a disproportionately higher amount of the tax burden.

Sellers will bear significantly less of the tax burden when compared with consumers. Consumers will bear a disproportionately higher amount of the tax burden when compared with producers.

When a price is increased at a point where demand is inelastic, revenue ___________. Perfect. Your hard work is paying off 😀 increases decreases does not change decreases and then increases

increases When demand is inelastic and price increases, quantity will decrease by a smaller percentage. As a result, total revenue will increase when price increases.

In the short run, a significant increase in the price of oil has little effect on the quantity of oil demanded. However, in the long run, a significant increase in the price of oil will significantly decrease the quantity demanded. Which of the following reasons explains this? Select the correct answer below: The elasticity of oil never changes, so the quantity demanded will not be impacted by a change in price. Oil is constant unitary elastic, so the changes will always be the same in price and quantity demanded. The demand for oil is more elastic in the short run and less elastic in the long run. The demand for oil is less elastic in the short run and more elastic in the long run.

In short run, consumers have less time and substitutes to switch to another substitute good in response to a change in price of a good. So demand is inelastic in short run. In long run, consumers have more time and substitutes to switch to another substitute good in response to a change in price of a good. So demand is elastic in long run. The demand for oil is less elastic in the short run and more elastic in the long run. Demand is often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. However, since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run.

Consider an industry where new technology which significantly lowers the cost of production has just been introduced. Which of the following are consequences of this change in a market with a relatively inelastic demand compared to supply? Note: Select two answers that apply.

The fall in production costs will increase supply. The lower costs of production will give a greater benefit to consumers than producers. When supply increases as a result of improved technology, the market equilibrium price falls as a result of supply shifting to the right (or increasing). When demand is relatively inelastic, this causes a small increase in equilibrium quantity, but a large decrease in equilibrium price. As a result, consumers will benefit to a greater degree than producers.

True or false? Addictive substances, for which demand is inelastic, are products for which producers can pass higher costs on to consumers.

True Addictive substances, for which demand is inelastic, are products for which producers can pass higher costs on to consumers. For example, the demand for cigarettes is relatively inelastic among regular smokers who are somewhat addicted. Economic research suggests that increasing cigarette prices by 10% leads to about a 3% reduction in the quantity of cigarettes that adults smoke. Because users of addictive substances are less responsive to increases in price, producers can pass higher costs along to consumers in the form of higher prices without much of a decline in equilibrium quantity.

True or false? Both demand and supply are generally more elastic in the long run than in the short run.

True Elasticities are often lower in the short run than in the long run. On the demand side of the market, it can sometimes be difficult to change quantity demanded in the short run, but easier in the long run. On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. However, over a few years, all of these are possible.

True or false?If the price elasticity of demand at the current price is 0.7 while the price elasticity of supply is 1.5 and the price of a major input to production falls, then consumers will reap more of the benefit than producers.

True If demand is more inelastic than supply, and the cost of a major input falls, then consumers will reap most of the benefits from the cost savings in the form of lower prices. Consumers benefit more, in general, when the demand curve is more inelastic because the shift in the supply curve results in a much lower price for consumers.

First-class plane tickets (for personal travel) are a product that has a ____________ demand curve. Perfect. Your hard work is paying off 😀 very inelastic highly elastic unitary elastic neither elastic or inelastic

highly elastic Luxury goods, goods that take a large share of individuals' income, and goods with many substitutes are likely to have perfectly elastic or infinitely elastic demand curves. Examples of such goods are Caribbean cruises, sports vehicles, and first class plane tickets.