Answers PE_Chapters1-5.doc.docx

8 a with a price elasticity of demand of 04 reducing

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8. a. With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20 percent requires a 50 percent increase in price, since 20/50 = 0.4. With the price of cigarettes currently $2, this would require an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 - $2)/$2.67 = . 50). b. The policy will have a larger effect five years from now than it does one year from now. The elasticity is larger in the long run, since it may take some time for people to reduce their cigarette usage. The habit of smoking is hard to break in the short run. c. Since teenagers don't have as much income as adults, they are likely to have a higher price elasticity of demand. Also, adults are more likely to be addicted to cigarettes, making it more difficult to reduce their quantity demanded in response to a higher price. 9. You’d expect the price elasticity of demand to be higher in the market for vanilla ice cream than for all ice cream because vanilla ice cream is a narrower category and other 42
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flavors of ice cream are close substitutes for vanilla. You'd expect the price elasticity of supply to be larger for vanilla ice cream than for all ice cream. A producer of vanilla ice cream could easily adjust the quantity of vanilla ice cream and produce other types of ice cream. But a producer of ice cream would have a more difficult time adjusting the overall quantity of ice cream. 10. a. As Figure 2 shows, in both markets, the increase in supply reduces the equilibrium price and increases the equilibrium quantity. b. In the market for pharmaceutical drugs, with inelastic demand, the increase in supply leads to a relatively large decline in the price and not much of an increase in quantity. Figure 2 c. In the market for computers, with elastic demand, the increase in supply leads to a relatively large increase in quantity and not much of a decline in price. d. In the market for pharmaceutical drugs, since demand is inelastic, the percentage increase in quantity will be less than the percentage decrease in price, so total consumer spending will decline. In contrast, since demand is elastic in the market for computers, the percentage increase in quantity will be greater than the percentage decrease in price, so total consumer spending will increase. 11. a. As Figure 3 shows, in both markets the increase in demand increases both the equilibrium price and the equilibrium quantity. b. In the market for beachfront resorts, with inelastic supply, the increase in demand leads to a relatively large increase in the price and not much of an increase in quantity. 43
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c. In the market for automobiles, with elastic supply, the increase in demand leads to a relatively large increase in quantity and not much of an increase in price. d. In both markets, total consumer spending rises, since both equilibrium price and equilibrium quantity rise.
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