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4[1] - Price per pair(33 100 200 300 400 500 600 Shoe sales...

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Unformatted text preview: Price per pair (33) 100 200 300 400 500 600 Shoe sales per week a. Calculate demand elasticity using the midpoint formula between points A and B, between points C and D, and between points E and F. b. If the store currently charges a price of $50, then increases that price to $60, what happens to total revenue from shoe sales (calculate P X Q before and after the price change)? Repeat the exercise for initial prices being decreased to $40 and $20, respectively. c. Explain why the answers to a. can be used to predict the answers to b. For each of the following scenarios, decide whether you agree or disagree and explain your answer. a. If the elasticity of demand for cocaine is —.2 and the Drug Enforcement Administration succeeds in reducing supply substantially, causing the street price of the drug to rise by 50%, buyers will spend less on cocaine. b. Every year Christmas tree vendors bring tens of thousands of trees from the forests of New England to New York City and Boston. During the last two years, the market has been very competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was —l.3, vendors would lose rev- enues altogether as a result of the price decline. c. If the demand for a good has unitary elasticity, or elasticity is —1, it is always true that an increase in its price will lead to more revenues for sellers taken as a whole. a For the following statements, decide whether you agree or dis- Price Price agree and explain your answer. a. The demand curve pictured here is elastic. Demand Quantity b. If supply were to increase slightly in the following diagram, prices would fall and firms would earn less revenue. Supply Demand Quantity CHAPTER 5 Elasticity Taxicab fares in most cities are regulated. Several years ago ta cab drivers in Boston obtained permission to raise their fares 10 percent, and they anticipated that revenues would increas about 10 percent as a result. They were disappointed, howeve When the commissioner granted the 10 percent increase, rev enues increased by only about 5 percent. What can you infer about the elasticity of demand for taxicab rides? What were taxicab drivers assuming about the elasticity of demand? Studies have fixed the short-run price elasticity of demand f0 10. gasoline at the pump at —.20. Suppose that international host ties lead to a sudden cutoff of crude oil supplies. As a result, I supplies of refined gasoline drop 10 percent. a. If gasoline were selling for $2.60 per gallon before the cutc how much of a price increase would you expect to see in t] coming months? b. Suppose that the government imposes a price ceiling on g: at $2.60 per gallon. How would the relationship between consumers and gas station owners change? Prior to 2005, it seemed like house prices always rose and never ft When the demand for housing increases, prices in the housing market rise but not always by very much. For prices to rise sub- stantially, the supply of housing must be relatively inelastic. That i if the quantity supplied increases rapidly whenever house prices rise, price increases will remain small. Many have suggested gov- ernment policies to increase the elasticity of supply. What specifir policies might hold prices down when demand increases? Explain For each of the following statements, state the relevant elasticit and state what its value should be (negative, positive, greater than one, zero, and so on). a. The supply of labor is inelastic but slightly backward-bendin b. The demand for BMWs in an area increases during times 0 rising incomes just slightly faster than income rises. c. The demand for lobsters falls when lobster prices rise (ceter paribus), but the revenue received by restaurants from the sale of lobsters stays the same. d. Demand for many goods rise when the price of substi- tutes rise. e. Land for housing development near Youngstown, Ohio, is i] plentiful supply. At the current price, there is essentially an infinite supply. [Related to the Economics in Practice on p. 100] A number of towns in the United States have begun charging their residents fo garbage pickup based on the number of garbage cans filled per week. The town of Chase decided to increase its per—can price from 10 cents to 20 cents per week In the first week, Chase founc that the number of cans that were brought to the curb fell from 550 to 525 (although the city workers complained that the cans were heavier). The town economist ran the numbers, informed the mayor that the demand for disposal was inelastic, and recom- mended that the city raise the price more to maximize town rev- enue from the program. Six months later, at a price of 30 cents per can, the number of cans has fallen to 125 and town revenues are down. What might have happened? [Related to the Economics in Practice on p. 100] At Frank’s Delicatessen, Frank noticed that the elasticity of customers dif- fered in the short and longer term. Frank also noticed that his increase in the price of sandwiches had other effects on his store. In particular, the number of sodas sold declined while the number of yogurts sold went up. How might you explain this pattern? *Note: Problems marked with an asterisk are more challenging. ...
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