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Elasticity of Demand and other microeconomics questions

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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?

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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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See Also This Related BrainMass Solution

Definition of some economics terms, using the midpoint formula to calculate the Price Elsticity of Demand

The questions are in the attachment files 1 and 2.

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Question 1

Define or explain the following economic terms:

a) Quantity demanded
b) Quantity supplied
c) Market equilibrium
d) Consumer surplus
e) Price elasticity of demand

Question 2

By using the midpoint formula, calculate the price elasticity for each of the following changes in demand by a household.
______________________________________________________________________________
Demand for P1 P2 Q1 Q2
______________________________________________________________________________

(a) Long-distance phone service $0.25 per min. $0.15 per min. 300 min. 400 min.
per month per month

(b) Orange juice 1.50 per qt. 1.90 per qt. 14 qt 12 qt
per month per month
_______________________________________________________________________________

Question 3

Do you agree or disagree with each of the following statements? Briefly explain your answers.

(a) The price of a good rises, causing the demand for another good to fall. The two goods are therefore substitutes.
(b) If demand increases and supply increases at the same time, price will clearly rise.
(c) A shift in supply causes the price of a good to fall. The shift must have been an increase in supply.
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