Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 6, Problem 1MC
To determine
Effect of a decrease in taxes on gasoline.
Expert Solution & Answer
Explanation of Solution
Option (d)
As per the
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Students have asked these similar questions
Jim has estimated elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would:
a.
lower tax revenue in both the short and long run.
b.
raise tax revenue in both the short and long run.
c.
raise tax revenue in the short run but lower tax revenue in the long run.
d.
lower tax revenue in the short run but raise tax revenue in the long run.
Explain why the Elasticity value gets smaller as you move down the demand curve.
a.
As we move down the demand curve, equal changes in quantity represent smaller and smaller percentage changes, whereas equal changes in price represent smaller and snmaller percentage changes, and the absolute value of the elasticity measure declines.
b.
As we move down the demand curve, equal changes in quantity represent larger and larger percentage changes, whereas equal changes in price represent larger and larger percentage changes, and the absolute value of the elasticity measure declines.
c.
As we move down the demand curve, equal changes in quantity represent smaller and smaller percentage changes, whereas equal changes in price represent larger and larger percentage changes, and the absolute value of the elasticity measure declines.
d.
As we move up the demand curve, equal changes in quantity represent smaller and smaller percentage changes, whereas equal changes…
APPLYING ELASTICITY TO THE REAL WORLD
Instructions: Each of the following stories contains an assumption about the elasticity of demand. For each
story:
A. State whether the assumption made about the elasticity of demand is correct or wrong.
B. Justify your answer
1.
Mr. Kim, a candidate for the state legislature, is proposing a large increase in the tax on cigarettes and
liquor. He says, "I'm not proposing these taxes to raise revenue, but to discourage reckless drinking and
the filthy habit of smoking. If the prices of cigarettes and booze go up, most people will quit using
them. After all, no one has to drink or smoke."
2. KSJ, a candidate for Congress, proposes freezing the price of gasoline. "There is no substitute for
gasoline," he says. "People have to get from one place to another. Economists who say higher prices
will discourage people from buying as much gas as before don't live in the real world."
3. Councilman Acqua Man opposed a price increase for water during a recent…
Chapter 6 Solutions
Managerial Economics: A Problem Solving Approach
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Similar questions
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- Suppose Norman Bates, the owner-manager of a small local hotel, projects the following demand for his rooms: Price $110 130 Quantity purchased (per night) 10 8 a. Calculate the arc price elasticity between $110 and $130. Please report your answer to two decimal places. b. Is the price elasticity of demand between $110 and $130 elastic, unit elastic, or inelastic? C. Will Norman's total revenue rise if he increases the price from $110 to $130 per night? d. If the two points on the demand for Norman's rooms lie on a straight-line demand curve, what then is the point price elasticity of demand at a nightly price of $150? Please show your work and report your answer to one decimal place.arrow_forwardIf the consumers' income increase from $200 to $300, the quantity demanded for product X will increase from 80 to 100 whereas, the quantity demanded for product Y fall from 90 to 63.a.What is income elasticity of demand for product X?b. What kind of product X to these consumers? c. What is income elasticity of demand for product Y ?d.What kind of product Y to these consumers?arrow_forwardTwo drivers--Tom and Jerry--each drive up to a gas station. Before looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like $10 worth of gas." What is each driver's price elasticity of demand? A. Tom and Jerry both have elastic demand. B. Tom has elastic demand while Jerry has inelastic demand. C. Tom has inelastic demand while Jerry has elastic demand. D. Tom and Jerry both have inelastic demand.arrow_forward
- Based on your understanding of elasticity, will the elasticity of demand for HPlaptops increase, decrease, or remain the same when each of the followingevents occurs? Explain your answer.i. Other computer manufacturers, such as Apple, decide to make and selllaptops. ii. Following increased advertisements, Americans believe that laptops aremore efficient than desktop computers. iii. In the long run, new laptop models are produced. b. Because patties and coco bread are often eaten together, they arecomplementary goods.i. Note that both the equilibrium price of coco bread and the equilibriumquantity of patties have risen. What could be responsible for thispattern—a fall in the price of beef or a fall in the price of flour? Illustrateand explain your answer. ii. Suppose instead that the equilibrium price of coco bread has risen butthe equilibrium quantity of patties has fallen. What could be responsiblefor this pattern—a rise in the price of beef or a rise in the price of flour?Illustrate…arrow_forwardAnswer each of the questions on your paper and/or in a computer file. To receive credit, youmust show all work. The price elasticity of demand for business air travel is -0.75 and for nonbusiness air travel is-1.50. a. Give an interpretation of the price elasticity of demand for business air travel. b. In what category does the price elasticity of demand for nonbusiness air travel fall? c. Show graphically how airlines could use third-degree price discrimination in thiscase.arrow_forwardIf the price elasticity of supply for a good is 0.48, then this means that A. the supply is inelastic and therefore the demand must also be inelastic. B. a 10 percent increase in price results in a 4.8 percentage increase in quantity supplied. C. a 10 percent price increase results in a 4.8 percentage decrease in quantity supplied. D. the supply is elastic. E. the percentage increase in quantity supplied is greater than the percentage increase in price.arrow_forward
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