Aside q if demand is inelastic why wouldnt a firm

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Chapter 18 / Exercise 40
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Aside: Q: If demand is inelastic, why wouldn’t a firm keep raising P?
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Exploring Economics
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Chapter 18 / Exercise 40
Exploring Economics
Sexton
Expert Verified
Micro 101, Chapter 5 7 Determinants of price elasticity: • availability of substitutes -if good substitutes, then more ________ sensitive • how broadly the product is defined ex. “writing utensils” vs. “_________” vs. “Bic pens” • time horizon - more elastic in the __________ Practical examples... • Birdseye: introduced “orange juice from concentrate” - initially, no known D-curve - what price to set? - estimated EDby setting different_______ in different __________ • Pampers: found out D was very __________ • coupons: try to distribute only to those with elastic D -recall: if inelastic D, then P↓ implies TR↓
Micro 101, Chapter 5 8 • beer industry: - EDfor industry is -0.9 - EDfor Budweiser is -5.0 Implications for “real world”: - if all brewers could collude (illegal), would all like to raise price (no close substitutes) - but if Bud alone raises price by 10%, loses _____% of QD(many close substitutes) • public sector buses - suppose we see the following headline: “Ames Bus System in Red: Seeks Fare Increase, No Schedule Changes” - manager must be assuming ____________ D • national health insurance - free health care in England - governments often underestimate ΔQ when offering free servicesNational Health Service at Zero Price P Q D? Q?D? Q*P*Q?
Micro 101, Chapter 5 10 Recall the market for eggs: • suppose the price of eggs is 10 cents/ dozen - suppliers willing to produce less than buyers wish to purchase - would have a “shortage,” “excess demand” - leads to queues (lines) • not a stable situation: upward pressure on price • at P=10 cents, QD=5 > QS=1.5 - excess demand • amount sold is Q=1.5, not an equilibrium 00.10.20.30.40.5012345678P Q Excess Demand for Eggs P Q Excess Demand for Eggs
Micro 101, Chapter 5 11

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