What is the elasticity of demand when the price changes from $6 to $10? Does thi

ID: 1154903 • Letter: W

Question

What is the elasticity of demand when the price changes from $6 to $10? Does this make demand elastic, inelastic or unit elastic in this range?

What is the elasticity of supply when the price changes from $6 to $4? Does this make supply elastic, inelastic or unit elastic in this range?

What is the change in consumer surplus if a price ceiling of $4 is imposed?

What is the change in producer surplus if a price ceiling of $4 is imposed?

How much deadweight loss is caused by this price ceiling of $4?

Make an argument for/against such a price ceiling, clearly noting the strengths

and weaknesses of your argument (i.e. what would we be giving up if we followed your advice, and why, in your opinion, is this worth giving up).

ly indicate which questions you want graded) ? ·?-+ ? 12 18 24 Quantity

(A)

When Price = $6, Quantity demanded = 24

When Price = $10, Quantity demanded = 18

Using midpoint method, Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(18 - 24) / (18 + 24)] / [$(10 - 6) / $(10 + 6)]

= (- 6 / 42) / (4 / 16)

= - 0.57

Since absolute value of elasticity < 1, demand is inelastic.

(B)

When Price = $6, Quantity supplied = 24

When Price = $4, Quantity supplied = 18

Using midpoint method, Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(18 - 24) / (18 + 24)] / [$(4 - 6) / $(4 + 6)]

= (- 6 / 42) / (- 2 / 10)

= 0.71

Since absolute value of elasticity < 1, supply is inelastic.

(C)

When ceiling price = $4, market quantity = Quantity supplied = 18

Gain in consumer surplus = (1/2) x $(6 - 4) x 12 = (1/2) x $2 x 12 = $12

Loss in consumer surplus = (1/2) x $(10 - 6) x (24 - 18) = (1/2) x $4x 6 = $12

Total change in consumer surplus = Gain in consumer surplus - Loss in consumer surplus = $(12 - 12) = $0

(D)

When ceiling price = $4, market quantity = Quantity supplied = 18

Change in producer surplus = (1/2) x $(6 - 4) x [(24 + 18)] = (1/2) x $2 x 42 = $42

(E)

Deadweight loss = (1/2) x $(10 - 4) x (24 - 18) = (1/2) x $6 x 6 = $18

NOTE: As per Chegg Answering Policy, first 5 parts are answered.

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