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 drought. He claimed that there is no substitute for water and that therefore the demand for water is inelastic. He believes an increase in the price of water (with a water tax) will not cause the amount of water people to use to go down at all 4. Min King, the world traveler, says if the airlines want to attract more passengers, they should lower fares for business travelers as well as for vacationers. She believes both groups will respond equally to a price decrease
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 drought. He claimed that there is no substitute for water and that therefore the demand for water is inelastic. He believes an increase in the price of water (with a water tax) will not cause the amount of water people to use to go down at all 4. Min King, the world traveler, says if the airlines want to attract more passengers, they should lower fares for business travelers as well as for vacationers. She believes both groups will respond equally to a price decrease
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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 drought. He claimed that
there is no substitute for water and that therefore the demand for water is inelastic. He believes an
increase in the price of water (with a water tax) will not cause the amount of water people to use to go
down at all
4. Min King, the world traveler, says if the airlines want to attract more passengers, they should lower
fares for business travelers as well as for vacationers. She believes both groups will respond equally to a
price decrease
Page | 2-Week 4
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