Unit 4 Homework Answers
18. Use equation 2.28 from the text to solve for the change in price.
a. If demand is perfectly inelastic, the demand curve is vertical. The supply curve shifts up by $1, and all of the incidence falls on consumers. Price increases by $1, and there is no change in quantity. Since e = 0, dP/dt = 1.
b. The demand curve is horizontal when perfectly elastic. The supply curve shifts up by $1. Price paid by consumers remains at p (the pre-tax level). Price received by sellers is p – t (the price less the tax). Quantity falls to the intersection of the new supply curve and the original demand curve. Suppliers absorb the entire burden of the tax because consumers have no willingness to pay higher prices. Since e ® -¥, dP/dt = 0.
c. When supply is perfectly inelastic, the supply curve is vertical. Thus, shifting the supply curve upward would have no effect on the equilibrium quantity or price paid by consumers. Sellers would bear the entire burden of the tax. Since h = 0, dP/dt = 0.
d. When supply is perfectly elastic, the supply curve is horizontal. The supply curve shifts up by $1 increasing price by $1. The quantity falls and the incidence falls entirely on the consumer. Since h ® ¥, dP/dt = 1.
e. If the demand curve is perfectly elastic (horizontal), and the supply curve is perfectly inelastic (vertical), the effect of a tax would be no change in equilibrium quantity and no change in price paid by consumers, and sellers would bear the entire burden of the tax. Since e ® -¥ and h = 0, dP/dt = 0.
29. The demand elasticity is -2.65/21 = -0.13 for prenatal smokers.
30. The solution is in the text
- The solution is in the text
23. Guerdon consumes cereal with bananas at a price of pc + pb. The quantity of cereal will always equal the quantity of bananas (see Figure 4.20).
Figure 4.20
22. Solution in text