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PS2_SOL - PAM 2000 Intermediate Microeconomics Problem Set...

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PAM 2000, Intermediate Microeconomics Problem Set 2 suggested answers I. True, False or Uncertain. Explain . No credit given without explanation. Use graphs to help explain your answer whenever possible (2 points each). 1) If a linear supply curve has a zero intercept, the elasticity of supply is always unity. Answer: True. A linear supply curve from the origin takes the form Q =ap. Elasticity equals a*p/Q. Substituting for Q yields a*p/ap. Numerator and denominator cancel and the elasticity equals one at every price. 2) If the elasticity of demand for a good rises, ceteris paribus, then the incidence of a specific tax on consumers will fall. Answer: True. Intuitively, if the elasticity of demand for a good rises, then that means that consumers are more sensitive to a price change. So they can more easily find substitutes for the good if its price rises. Thus, when a tax is imposed on that good, consumers will substitute into those alternatives, and will bear less of the tax. To see this graphically, consider the tax incidence on consumers for the two extreme cases
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