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Solution_Set_1.S-2008 - 2 If the price of tobacco is...

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Principles of Economics W1105y-2 Spring 2008 Solution Set #1 1. (b) It depends on whether demand responds to the lower price and by how much. The diagram in (a) suggests that if price was lowered by a lot, the stadium would be filled. If demand is „elastic‰ enough, the quantity demanded will increase by more than the fall in ticket price, and revenues will rise. If demand is not responsive enough, the quantity demanded may not increase enough to offset the fall in ticket prices, and revenues will fall. The easiest example of the latter would occur if demand were perfectly inelastic, which implies that no one else would come to the game despite the lower price. (c) The price system was not allowed to work to ration the New York tickets. Some other rationing device must have been used. Perhaps people stood in line or queued. Perhaps there was a lottery. In all likelihood, there would be a secondary market for the tickets („scalpers‰). You could no doubt find them for sale on line at a high price.
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Unformatted text preview: 2. If the price of tobacco is supported by limiting land used to grow it, then the supply curve for tobacco shifts to the left. The anti-smoking publicity works to shift the demand curve to the left. Both of these policies work together to reduce consumption of tobacco. 3. Since the new budget constraint goes through the initial point of consumption, point it cannot have the same slope as indifference curve original indifference curve at this point – since the indifference curve cannot be tangent to two budget constraints with different slopes. A higher indifference curve is possible (the TAs can further explain this in lab). 4. (a) Disagree. The top half of the demand curve is elastic. (b) Disagree. Price would fall but firms would earn more revenue because demand is elastic over the range of prices shown....
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