Economics Study Set 17

Business

Quiz 6 :

Demand and Elasticity

Quiz 6 :

Demand and Elasticity

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Explain why the elasticity of a straight-line demand curve varies from one part of the curve to another.
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The elasticity of a straight-line demand curve varies from one point of the curve to another due to changes in the percentage change in quantity demanded. The price elasticity of demand decreases slowly as curve moves from left to the right.
The price elasticity of demand is a measurement of percentage change in demand considering a percentage change in the price of the commodity. It gives an idea about percentage decline in demand due to a percentage increase in price and a percentage rise in demand due to a percentage fall in price. The following is a formula for measuring the elasticity of demand.
img This formula shows that the price elasticity of demand changes if there is a percentage change in the quantity demanded. The movement from left to the right indicates that denominator in the formula increases steadily whereas the numerator decreases.
Thus, considering the changes in percentage change in quantity demanded and price the elasticity of a straight line demand curve differs from one part to another.

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Taxes on particular goods discourage their consumption. Economists say that such taxes "distort consumer demands." In terms of the elasticity of demand or elasticity of supply for the commodities in question, what sort of goods would you choose to tax to achieve the following objectives a. Collect a large amount of tax revenue b. Distort demand as little as possible c. Discourage consumption of harmful commodities d. Discourage production of polluting commodities
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(a) A large amount of revenue can be generated by imposing taxes on the goods which have inelastic demand. Imposition of taxes results in an increase in the price of goods. If the demand is inelastic, then an increase in the price reduces the demand. But, if the demand is inelastic, then rise in the price do not affect on the quantity demanded.
(b) The demand for goods having inelastic demand is distorted comparatively less due to imposition of taxes. For example, the demand for salt is not distorted due to imposition of taxes considering that the demand for salt is inelastic.
(c) An imposition of taxes leads to reduce the consumption of the goods having elastic demand. An increase in the price leads to decrease the demand if the demand is price elastic. Thus, one would choose impose taxes on elastic harmful commodities for discouraging the consumption.
(d) One would choose to impose taxes on polluting commodities which have elastic demand for discouraging the production. Imposition of taxes tends to increase the price and an increase in the price leads to reduction in the quantity demanded. Producers are likely to reduce production considering decrease in the quantity demanded.

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If the price elasticity of demand for gasoline is 0.3 and the current price is $3.20 per gallon, what rise in the price of gasoline will reduce its consumption by 10 percent
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The elasticity of demand is a measurement of percentage change in the quantity demanded considering a percentage change in the price of the commodity. It gives an idea about percentage decline in quantity demanded due to a percentage increase in price and a percentage rise in quantity demanded due to a percentage fall in price.
The following formula is used to calculate the percentage rise in the price for reducing the consumption of gasoline by 10 percent.
img Putting in formula,
img Thus, considering the price elasticity, 33.33 percentage rise in the price is required for reducing the consumption of gasoline by 10 percent.

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Describe the probable shifts in the demand curves for a. Airplane trips when airlines' on-time performance improves b. Automobiles when airplane fares double c. Automobiles when gasoline prices double d. Electricity when the average temperature in the United States rises during a particular year ( Note: The demand curve for electricity in Maine and the demand curve for electricity in Florida should respond in different ways. Why )
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Explain why the following statement is true: "A firm with a demand curve that is inelastic at its current output level can always increase its profits by raising its price and selling less." ( Hint: Refer back to the discussion of elasticity and total expenditure/total revenue on pages 115-117.)
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For each of the product pairs given in Test Yourself Question 7, what would you guess about the products' cross elasticity of demand a. Do you expect it to be positive or negative b. Do you expect it to be a large or small number Why
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Name some events that will cause a demand curve to shift.
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A rise in the price of a certain commodity from $20 to $25 reduces quantity demanded from 25,000 to 10,000 units. Calculate the price elasticity of demand.
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A rise in the price of a product whose demand is elastic will reduce the total revenue of the firm. Explain.
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What variables other than price and advertising are likely to affect the quantity demanded of a product
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Which of the following product pairs would you expect to be substitutes, and which would you expect to be complements a. Shoes and sneakers b. Gasoline and sport-utility vehicles c. Bread and butter d. Compact discs and digital music files
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Explain why elasticity of demand is measured in percentages.
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Give examples of commodities whose demand you would expect to be elastic and commodities whose demand you would expect to be inelastic.
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Explain why the elasticity of demand formula normally eliminates minus signs.
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