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Page 59 1a. Total revenue is $30 million (= $3000 x 10 000) at a price of $3000, $40 million (= $2000 x 20 000) at $2000, and $30 million (= $1000 x 30 000) at a price of $1000. b. The market demand curve is elastic in the price range $3000 to $2000, since total revenue and price move in opposite directions. Total revenue rises as price falls. In contrast, the demand curve is inelastic in the range $2000 to $1000, because total revenue and price are moving in the same direction, with both falling. c. Between prices $3000 and $2000, the demand elasticity has a value of (-)1.67 [= ((20 000 - 10 000)/(15 000))/(($2000 - $3000)/($2500))], and between $2000 and $1000, it has a value of (-)0.60 [= ((30 000 - 20 000)/(25 000))/(($1000 - $2000)/($1500))]. d. Yes, the answers are consistent. The numerical value of elasticity between prices $3000 and $2000 is greater than one. This is consistent with part b. where demand in this price range was found to be elastic. Similarly, the numerical value between $2000 and $1000 is less than one, which is consistent with part b., where demand in this range was found to be inelastic. e. Yes. This graph is consistent with the answers above. In the $3000-to-$2000 price range, the rectangles expand as price falls, which indicates that demand is elastic. In the $2000-to-$1000 price range, the rectangles contract as price falls, which indicates that demand is inelastic. 2a. The cross-price elasticity has a value of 1.29 [= ((750 000 - 1 million)/(875 000))/(($20 000 - $25 000)/($22 500))]. b. The price elasticity of demand has a value of (-)0.54 [= ((17 500 - 15 000))/((16 250)/($90 - $120)/($105))]. c. The income elasticity has a value of -0.87 [= ((3000 - 2000)/(2500))/(($50 000 - $80 000)/($65 000))]. page 63 a. es is 0 [= ((80 000 - 80 000)/(80 000))/(($1.20 - $1)/($1.10))], and the immediate-run supply curve is vertical at the constant quantity supplied of 80 000 heads. b. es is 1 [= ((1.2 million – 1 million)/(1.1 million))/(($1.20 - $1)/($1.10))], and the short-run supply curve is positively sloped. c. The long-run supply curve is horizontal at the constant price of $1, and es is therefore undefined. d. This is a constant-cost industry, since its long-run supply curve is perfectly elastic. This means the industry is not a major user of any single resource, so price is always driven back to its original level in the long run after a change in production. e. Page 67 a. With a ceiling of $500 set below the equilibrium value of $650, a shortage of rental accommodation is created. Landlords will receive less revenue, and are harmed. Tenants able to find rental accommodation despite the shortage will gain. Tenants who are not able to find rental accommodation, however, will lose as they are end up being forced into the unregulated portion of the market, where rents are often higher than in the regulated market. b. With a price floor of $2 imposed above the equilibrium value of $1.50, a surplus will appear, and the government will be forced to purchase this surplus at $2 per kg. Cheddar consumers are hurt, as they pay a higher price and buy fewer units. Producers are helped, as they produce more cheddar and gain a greater price than before for the cheddar they sell. c. Because the price ceiling of $700 is set above the equilibrium value of $600, there will be no effect in the market. Page 71 a. Because the dance club disturbs nearby residents, it has a spillover cost. To deal with this cost, government officials could ban dance clubs in suburban neighbourhoods. b. By reducing traffic congestion, the subway has a spillover benefit. To take account of this benefit, use of the subway could be promoted by a government subsidy. c. Since throw-away batteries add to soil pollution, they have a spillover cost. This cost could be dealt with by imposing an excise tax to reduce their popularity, or this product’s use could be banned. |