Ch04-HW

1) Suppose a product has a linear demand curve such that Price = 1000 – Q

A) What is the price elasticity of demand if the price of the product declines from $800 to $600?

B) What is the price elasticity of demand if the price of the product declines from $400 to $200?

C) What can you conclude about the elasticity of products that have linear demand curves?

2) The price elasticity of demand for automobiles equals about 0.2.

A) Does this mean a 1% rise in car prices leads to a 0.2% rise in revenue?

B) Does this mean Ford can raise prices by 1% and only suffer a 0.2% decline in the quantity of its cars sold?

3) When governments impose taxes on firms, they can create an inefficiency called “Dead Weight Loss.” Dead Weight Loss only occurs if a tax causes a good’s equilibrium quantity consumed to change. Suppose a government imposes a $1 tax on cigarettes and movie theater tickets. Which do you suppose suffers the greater DWL? BONUS: The DWL will appear on a diagram as a triangle representing the change in quantity consumed * the size of the tax. Can you find it?

4) Firm A is producing at full capacity, while Firm B has ample space and idle machinery. Which company has a greater elasticity of supply? Draw supply curves reflecting this.

5) Read “Class War: MySpace Vs. Facebook” by Claire Cain Miller (a July 23, 2007 column on Forbes.com). What can you say about the value of the income elasticity among teenagers for Facebook?