Brandon Wallace tutors economics students. He finds that when he charges $5 per hour, students demand a
total of 30 hours of tutoring per week; however, when he raises his rate to $8 per hour, they demand only
26 hours of tutoring.
a.Calculate the price elasticity of demand for Brandon’s tutoring.
b.Is demand for Brandon’s tutoring price elastic, unit elastic, or price inelastic? Which rate should he
charge to maximize his revenue?
c.Brandon finds that he can raise his rate to $10 per hour during the week before final exams and
students will continue to demand 26 hours of tutoring. Explain why this is so.
6. a.What effect will a tax on cigarettes have on the consumption of cigarettes and on the wallets of
smokers who are addicted to cigarettes?
b.What effect will a tax on cigarettes have on the decision of teenagers to smoke?
c.Describe the cross elasticity between cigarettes and the price of a Nicoderm patch, which is used to
fight the craving for nicotine.
7. The Grinch is now the mayor of your hometown, and he’s still trying to steal Christmas. On the day after
Thanksgiving, he announces a $25 tax on fresh Christmas trees. Tree farmers are angry to hear this because
they have already delivered this season’s freshly cut trees to the tree lots in your town. You hear your
neighbors planning to buy an artificial tree, and your family decides to drive to the next town to buy a tree.
a.Who will bear the biggest share of the burden the first Christmas season this tax is in effect? Why?
b.Will your answer change for subsequent Christmases? Why?
8. Using the concept of elasticity, show that a drug enforcement policy aimed at getting rid of heroin suppliers
may not be very effective in reducing heroin consumption.
9. Suppose that the price of gasoline doubles overnight. Why is the short-run price elasticity of demand for
gasoline different from the long run?
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