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Applications of the price elasticity of demand

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1) Why do you think that whenever the government wants to increase their revenue they usually decide to increase the tax on items such as gas, tobacco products and/or alcohol?

2) Why is it unlikely that a firm would sell at a price where its demand curve happens to be price inelastic?

3) Assume the demand for cosmetic or plastic surgery is price inelastic. Are the following statements true or false? Explain.

a. when the price of plastic surgery increases, the number of operations decreases.
b. the percentage change in the price of plastic surgery is less than the percentage change in quantity demanded.
c. changes in the price of plastic surgery do not effect the number of operations
d. quantity demanded is quite responsive to changes in price
e. if more plastic surgery is performed, expenditures on plastic surgery will decrease.
f. the marginal revenue of another operation is negative.

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1) Why do you think that whenever the government wants to increase their revenue they usually decide to increase the tax on items such as gas, tobacco products and/or alcohol?

Items like gas, tobacco products and alcohol have inelastic demand. Increasing the tax leads to an increase in price of the good. In case of inelastic demand, percent drop in quantity demanded will be less than percent increase in price and total revenue will increases. So, total tax revenue will also increase. We can see that government can increase its tax revenues without distorting the consumption for the inelastic cases.

2) Why is it ...

$2.19
See Also This Related BrainMass Solution

Price elasticity and its applications

Over the last year your boss has noticed that it would be useful for your firm to understand how consumers behave when variables in the market change and how these changes affect the total revenue for your product. You have been asked to do an analysis for your product, Good A, by addressing the following questions and reporting the results to your boss in a formal paper.

Questions:

Define the price elasticity of demand? What information does it provide? How is it calculated?

Define the income elasticity of demand? What information does it provide? How is it calculated?

Define the cross-price elasticity of demand? What information does it provide? How is it calculated?

What is total revenue? How is it calculated?

Define elastic, inelastic, and unitary elasticity means. How are these related to total revenue? Explain your answers.

With respect to the price elasticity of demand, construct a graph using the data in Figure1. Illustrate the ranges on the demand curve that indicate elastic, inelastic, and unitary elasticity. Explain your answers. Enter non-numerical responses in the same worksheet using textboxes.

Calculate the total revenue for each level of demand and post into the table, Figure 1. (Copy and paste this table into the Microsoft Word document that will form part of your submission.)

Using the midpoints formula presented in the textbook, calculate the price elasticity coefficient for each price level, starting with the coefficient for the $4 to $6 level. For each coefficient, indicate each type of elasticity: elastic demand, inelastic demand, or unitary demand. Post your answers into the table, Figure 1.

Assume that the income of consumers changes by 10%, and as a result the quantity demanded for Good A changes by 8%. What is the income elasticity of demand for Good A? What does this mean for your company?

Assume that the price of competing Good B decreases by 5% and as a result, the quantity demand for Good A decreases by 8%. What is the cross-price elasticity for your product? What type of goods are Good A and Good B?
Figure 1: The Demand Schedule for Barbeque Dinners

price quantity Total Revenue Elasticity Elastic or Inelastic
demanded coheficient

$4 100 XXXX XXXX
6 80
8 60
10 40
12 20
14 1

Required:

Prepare an analysis by answering the above-noted questions. Your analysis will consist of two documents as follows:

Microsoft Word document: Questions 1-5, 7-10.
Microsoft Excel worksheet: Question 6

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