Question

a-Define the demand function of a good and its price elasticity of demand.

b- Suppose that the government wants to maximize tax revenue. Explain why it may be not a good idea for the government to raise tax rates for a good with a price elasticity of demand more than one.

Answer #1

(a)

Demandfunction shows the relationship between quantity demanded of a good and it's determinants. For example price , price of related goods, income etc.

The price elasticity of demand measures the responsiveness quantity demand of a good due to change in the price.

If Ed<1 inelastic demand, if Ed>1 elastic demand and if Ed=1 unit elastic demand.

(b)

If elasticity of demand is inelastic, it raises more tax revenue because with the increase in price of a inelastic good, the responsiveness of quantity demanded doesn't change much. If the elasticity of demand is greater than one, then with the change in price due to tax, the quantity demand of a good is affected by more amount.

Sothe tax revenue decrease if tax is imposed on the elastic demanded good. Therefore if government wants to maximize tax revenue, then it should not impose tax on elastic demanded good (Ed>1)

b- Suppose that the government wants to maximize tax revenue.
Explain why it may be not a good idea for the government to raise
tax rates for a good with a price elasticity of demand more than
one. Explanation with diagram

Suppose price elasticity of demand is relatively inelastic for
good X. If the price elasticity of supply for good X is elastic and
an excise tax is imposed on good X, who will bear the greater
burden of the tax?
A. producers
B. both consumers and producers equally
C. government
D. consumers

Suppose the own price elasticity of demand for good X is -5, its
income elasticity is 1, its advertising elasticity is 3, and the
cross-price elasticity of demand between it and good Y is 4.
Determine how much the consumption of this good will change if:
a) The price of good X decreases by 5 percent.
_____%
b) The price of good Y increases by 8 percent.
_____%
c) Advertising decreases by 2 percent. _____%
d) Income increases by 4...

1. The price elasticity of demand for iphone 6 is 1.2. Apple
wants to increase its total revenue. Would you recommend that Apple
raise or lower the price of iphone 6? Explain your answer.
2. The demand of gasoline is more inelastic in the short run
than in the long run. Why? Give examples that illustrate why the
demand of gasoline in the long run is not inelastic.
3. Choose one of the products or services that your company
provides,...

Suppose the own price elasticity of demand for good X is -3, its
income elasticity is -2, its advertising elasticity is 4, and the
cross-price elasticity of demand between it and good Y is -2.
Determine how much the consumption of this good will change if:
Instructions:
Enter your responses as percentages. Include a minus (-)
sign for all negative answers.
a. The price of good X decreases by 7 percent.
b. The price of good Y increases by 10...

Suppose the own price elasticity of demand for good X is -5, its
income elasticity is -1, its advertising elasticity is 4, and the
cross-price elasticity of demand between it and good Y is 3.
Determine how much the consumption of this good will change if:
Instructions: Enter your responses as percentages. Include a minus
(-) sign for all negative answers.
a. The price of good X decreases by 6 percent.
percent
b. The price of good Y increases by...

Suppose the own price elasticity of demand for good X is -2, its
income elasticity is -1, its advertising elasticity is 2, and the
cross-price elasticity of demand between it and good Y is -3.
Determine how much the consumption of this good will change if:
Instructions: Enter your responses as percentages. Include a minus
(-) sign for all negative answers.
a. The price of good X decreases by 4 percent. percent
b. The price of good Y increases by...

Suppose a tax is imposed on a good with a price elasticity of
demand of -0.3.
a. What
will happen to consumer surplus, if anything?
b. What
will happen to producer surplus?
c. Who
bears more of the burden of the tax, producers or consumers?

The
price elasticity if demand for iPhone X is 1.2 Apple want to
increase its total revenue. Would you recommend that Apple raise or
lower the price of iPhone X explain your answer
The demand of gasoline is more inelastic in the short run than
in long run. Why? Give examples that illustrate why the demand of
gasoline in long run is not inelastic

Define the price elasticity of demand and explain how total
revenue is related to price elasticity.

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