for each of the following scenarios, decide whetheryou agree or disagree and exp

Question

for each of the following scenarios, decide whetheryou agree or disagree and explain your answer.
a.if the elasticity of demand for cocaine if -.2 and the DEA succeeds in reducing the supply substantially, causing the street price to rise by 50%, buyers will spend less on cocaine.
b. every year christmas tree vendors bring 10s of 1000s of trees to new york city and boston. during the last 2 years, the market has been very competitive, as a result, price has fallen by 10%. if the price elasticity of demand was -1.3, vendors would lose revenues altogether as a result of the price decline.
c. if the demand for a good has unitary elasticity, or elasticity is -1, it is always true that an increase in its price will lead to more revenues for sellers taken as a whole.

Explanation / Answer

a) agree. elasticity of demand = - 0.2. It means for 1% increase in price of cocaine, demand will fall by 0.2%. So, for 50% price rise, demand falls by 50*0.2 = 10%. Thus there will be less spending on cocaine. b) agree. price elasticity of demand is = -1.3 so, if price falls by 10%, demand will rise by 10*1.3 = 13% so, Revenue = (1-010)*(1+0.13) = 0.9*1.13 =1.017 ie increase 0f 1.7% Thus Revenue is slightly more than that earlier. c) disagree. Revenue with a% change in price = (1+a/100)*(1-a/100) = 1 -(a/100)^2 < 1 Thus, with any increase in price will result in less revenue than earlier.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---