Demand and Demand Elasticities
If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue that orange juice sellers receive?
If the demand for orange juice is inelastic, then an increase in price will increase total revenue for orange juice sellers.
Coase Theorem says if property rights are clearly defined, and transaction costs are low, then private bargaining will lead to an efficient outcome
Coase theorem is "better" in theory as it typically will lead to more efficient outcomes, and everyone is left better off. E.g. A factory paying persons money in order to pollute.
Consider the given graph showing the market for apples and suppose that the government has imposed a price floor of $10 per crate. How many crates of apples will be sold to consumers after the price floor has been imposed? Will there be a shortage or a surplus of apples? If there is a shortage or a surplus, how large will it be? Will apple producers benefit from the price floor?
28 million crates
A surplus of 6 million crates (QD = 28, QS = 34, Surplus = QS − QD = 34 − 28 = 6 million crates)
The apple producers will benefit. Their revenue will increase from $8 × 30,000,000 = $240,000,000 to $10 × 28,000,000 = $280,000,000.
What is the difference between absolute advantage and comparative advantage? If a country has an absolute advantage in producing a good, will it always be an exporter of that good? Briefly explain.
Absolute advantage is the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources. Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Comparative advantage, not absolute advantage, determines whether a country will be an exporter of a good, so a country will not necessarily be an exporter of a good in the production of which it has an absolute advantage.
Come to the board, write the formula for price elasticity of demand. State why elasticity is not just measured by the slope of the demand curve
(percentage change in quantity demanded)/(percentage change in price). The price elasticity of demand isn’t measured by the slope of the demand curve because the slope depends on the units of measurement.
Briefly explain whether each of the following statements describes a change in supply or a change in quantity supplied.
1) To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output.
2) The success of Nike and Adidas athletic shoes leads more firms to begin producing athletic shoes.
3) In the six months following the Japanese earthquake and tsunami in 2011, production of automobiles in Japan declined by 20 percent.
a. Change in quantity supplied: The price increased, so the quantity supplied increases, causing a movement up the supply curve.
b. Change in supply: The number of firms in the market increased, so supply increases, causing the supply curve to shift to the right.
c. Change in supply: The pandemic caused a decrease in the supply of automobiles, so the supply curve shifted to the left.
When the price of Snickers is $6 the quantity of Hershey's sold is 18 million. However, when the price of Snickers is $4, the quantity of Hershey's sold is 22 million. What is the cross-price elasticity between the two products? Are the products substitutes, complements, or unrelated?
CPE is -0.67, the goods are complements
The fumes from dry cleaners can contribute to air pollution. Suppose the following graph illustrates the situation in the dry cleaning market.
a) Explain how a government can use a tax on dry cleaning to bring about the efficient level of production. What should the value of the tax be in this case?
b) How large is the deadweight loss (in dollars) from excessive dry cleaning, according to the graph?
a. The tax should be the amount necessary to shift the supply curve from S1 to S2. That amount is $7.50 – $7.15 = $0.35 per item dry cleaned.
b. The deadweight loss from excessive dry cleaning arises because the efficient number of items to dry clean is 600,000 per week, but the market equilibrium is 750,000 items per week. The following graph shows that the deadweight loss equals the amount by which the marginal social cost (S2) of cleaning the last 150,000 items exceeds the marginal benefit (the height of the demand curve for each of these items). The deadweight loss is shown by area A of the figure and has a value equal to: 0.5 × $0.35 × 150,000 = $26,250. (Note: We know that the base of the deadweight loss triangle must be $0.35 because S2 is parallel to S1, so the distance between them is constant.)
Use the graph to answer the questions.
Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C and the price elasticity of demand for D2 between point A and point B. Which demand curve is more elastic, D1 or D2?
Suppose Yolanda is initially selling 200 cones per day at a price of $3.00 per cone. If she cuts her price to $2.50 per cone and her demand curve is D1, what will be the change in her revenue? What will be the change in her revenue if her demand curve is D2?
On D1, A to C, the price elasticity of demand is -2.2
On D2, A to B, the price elasticity of demand is -0.65
Because the quantity response is much larger for the same price change, demand curve D1 is much more elastic than D2.
Along D1, revenue increases from $3 × 200 = $600 to $2.50 × 300 = $750. Revenue rises by $150 as the price is cut because this demand curve is elastic between these prices. Along D2, revenue falls from $600 to $2.50 × 225 = $562.50. Revenue falls by $37.50 as the price is cut because D2 is inelastic between these prices.
The given graph shows a market in which a price floor of $3.00 per unit has been imposed. Calculate the values of:
a. The deadweight loss
b. The transfer of producer surplus to consumers or the transfer of consumer surplus to producers
c. Producer surplus after the price floor is imposed
d. Consumer surplus after the price floor is imposed
a. The deadweight loss from the price floor equals C + E. C = 0.5 × $1 × 10,000 = $5,000 and E = 0.5 × $1 × 10,000 = $5,000. So, deadweight loss = $10,000. Or, we can calculate the area of the deadweight loss triangle directly: ½ (20,000 − 10,000) × (3 − 1) = $10,000.
b. The price floor transfers area B from consumers to producers. The value of area B is $1 × 10,000 = $10,000.
c. Producer surplus after the price floor is imposed is equal to areas B + D + F = ($1 × 10,000) + ($1 × 10,000) + (1/2 × $1 × 10,000) = $25,000.
d. Consumer surplus after the price floor is imposed is equal to area A. The value of area A is
½ × $1.00 × 10,000 = $5,000.