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Elasticity of Demand and other microeconomics questions

1. A major cereal manufacturer decides to lower prices from $3.60 to $3.00 per 15-ounce box. If quantity demanded increases by 18%, what is the price elasticity of demand? Is this an example of elastic or inelastic demand?

2. To increase state tax revenues, the Governor of California has proposed an additional sales tax on all automobiles deemed to be exotic in nature; that is, two door coupes and convertibles with a dealer sticker price of at least $100,000. Comment on the validity of this proposed tax.

3. Illustrate the each of the following in demand and supply diagrams:

a. An increase in demand, all things equal
b. A decrease in demand, all things equal
c. An increase in supply, all things equal
d. A decrease in supply, all things equal

THERE SHOULD BE 4 DIAGRAMS COMPLETED FOR THIS QUESTION. IF YOU HAVE PROBLEMS GRAPHING DIAGRAMS, THEN YOU CAN JUST DESCRIBE IN WORDS THE MOVEMENTS OF THE DEMAND AND SUPPLY FOR EACH OF THE 4 SCENARIOS ABOVE.

4. The market shares in the U.S. airline industry for 1986 were the
following:

United 17% Northwest 9%
American14% TWA 8%
Delta 12% Pan Am 7%
Eastern 12% Eight others 2% each

Calculate the 4-firm concentration measure. How would it change if Delta merged with United?

Solution Preview

1. Elasticity is defined as percentage change in quantity demanded/percentage change in price.
Quantity demanded increased by 18%
Price decreased by (3.6-3)/3 = 20%
Thus elasticity = - 18/20 = -0.9

Since mod(E) < 1 the demand is inelastic.

2. The purpose of sales tax is to increase state revenue. However, if an increase in tax, decreases the demand ...

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