Tuesday, December 13, 2016

2010 B Micro FRQ #3

2010 B Micro FRQ #3

(A) The table below gives the quantity of good X demanded and supplied at various prices.

(i) Is the demand for good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

Elastic Cheat sheet is here.

First way to get this answer - - -

Second way to get this answer - - -     
 Total Revenue = P x Q
Total Revenue Test
Total Revenue at $30 price = Qd (1) x $30 = $30TR
Total Revenue at $20 price = Qd (3) x $20 = $60TR

Price decreased and Total Revenue increased = Relatively Elastic Demand
From the Elasticity Cheat Sheet

(ii) Is the supply of Good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

From the Cheat Sheet:





(iii) If a per-unit tax is imposed on good X, how will the tax be distributed between the buyers and sellers?

If the quantity supplied  does not change  when the price changes we assume that the good is perfectly inelastic. A perfectly inelastic supply implies that the supplier can't change the quantity of the good he produces. If a tax is imposed an a seller with a perfectly inelastic supply curve the seller will pay the total amount of the tax. 

(The one with the most inelasticity pays the burden of the tax) Know this...

(B) Assume that the income elasticity of demand for good Y is a -2. Using a CLG of the market for Good Y, show the effect of a significant increase in income on the equilibrium price of Good Y in the short-run.

You must understand that the YED, income elasticity of demand, when negative means that Good Y is an inferior good. 

From the Elasticity Cheat Sheet here.
From the Demand and Supply Cheat Sheet here

The "Y" in the cheat sheet above stands for Income. 
If Income (Y) increases then the quantity demanded of the good will decrease.
This is a bit confusing and perhaps I should rework the cheat sheet as actual Demand shifts to the left.
Demand decreases due to the rising incomes and Good Y being an Inferior good.


Remember from the Demand and Supply Cheat Sheet.
Inferior Good - (Y) Income increases then Demand (D) decreases

When Income increases the demand for Good Y decreases



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