Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 8, Problem 8MC
To determine
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Suppose (the numbers are loosely based on reality) that the tax on petrol is raised from 40 cents per litre to 60 cents per litre. The before-tax total cost of retailing petrol is $1.20 per litre. Assume that 100% of the tax is always passed through to consumers. After the increase in taxes, the quantity of petrol sold falls from 3,000,000 litres a day to 2,800,000 litres a day.
Calculate the price elasticity of demand for petrol using the mid-point formula, based on the change in price due to the tax. Use three decimal places in your calculations. What are the implications for policymakers who want to raise revenue, when considering raising taxes on petrol?
Grilled cheese sandwiches are $4, and the quantity demanded is 60. When the price falls to $3/sandwich, the quantity demanded rises to 80. What is the price elasticity of grilled cheese sandwiches?
Widgets are $3, and the quantity demanded is 200. When the price of widgets rises to $5, the quantity demanded falls to 100. What is the price elasticity of demand for widgets?
Coffee is $1 per cup, and the quantity demanded is 500. The price of coffee rises to $1.25 per cup, and the quantity demanded falls to 400. What is the price elasticity of demand for cups of coffee?
1. The equation for a demand curve is P = 45 - 3Q.
What is the elasticity in moving from a quantity of 4 to
a quantity of 5?
2. The equation for a demand curve is P = 4/Q. What
is the elasticity of demand as the price falls from 10 to 8?
What is the elasticity of demand as the price falls from 18
to 16? Would you expect these answers to be the same?
Chapter 8 Solutions
Managerial Economics: A Problem Solving Approach
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