for each of the following scenarios, decide whetheryou agree or disagree and exp
ID: 1250083 • Letter: F
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
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