Question

A typical elasticity, somewhat inelastic and occurring for such items as movies or shoes.

Often for convenience, economists leave off the minus sign for price elasticity of demand. However, we need to remember that quantity demanded always falls when price rises.

Now you try one for income elasticity.

If: Quantity cars demanded =  I n c o m e 2 + 3 x i n c o m e + 40

And Income = $1000;

What is the income elasticity of demand?

A) About 2, meaning that much more of the items is purchases as income rises. The item is income elastic.

B) About 0.5, meaning that somewhat more, but not proportionately as much of the item is purchased as income rises. The item is income inelastic.

C) About -2, meaning that less of the item is purchased as income rises. The item is a an inferior good.

Make your choice then go to: Elasticity 2

Elasticity 2:

Try another problem, time for taxes and labor supply. There is a policy debate about the effect of tax rates on work effort: how much less will people work if taxes are raised?

If Labor hours supplied = - 0.2 x Marginal tax rate x100 + 40,

What is the elasticity of labor supply with respect to the tax rate if labor hours are 40; tax rate = 25%?

A) 0.25

B)-0.125

C)-2.5

D)- 0.2

E)2.125

Choose your answer then go to Elasticity 3

Elasticity 3:

If Labor hours supplied = - 0.2 x Marginal tax rate x 100 + 40,

What is the elasticity of labor supply with respect to the tax rate if

labor hours are 40

tax rate = 25?

Answer : -0.125

First calculate the derivative of labor hours with respect to the tax rate

∂ l a b o r s u p p l y ∂ t a x r a t e = 0.2

Elasticity of labor supply with respect to the tax rate =

∂ l a b o r s u p p l y ∂ t a x r a t e x tax rate/labor supply

So elasticity = -0.2 x 24/40 = -0.125

In this case there is only a small reduction in hours worked when the rate is 25%.

Answer 1