Calculate the arc price elasticity of demand for wheat in the two situations below:
The Wheat MarketFarmer Brown's Wheat
Old price; $3.40/buOld price; $3.40/bu
Old quantity; 2.5 billion buOld quantity; 28,000 bu
New price; $3.20/buNew price; $3.20/bu
New quantity; 2.525 billion buNew quantity; 35,000 bu
Can you account for the difference in elasticities?
110) When the government decides to impose a tax on sellers of a good or service, sellers try to pass the tax on to consumers by raising the price of the good being sold. Assume the government decides to place a $1 tax on each unit of a good sold, e.g., tires. Using the simple model of supply and demand, illustrate what would happen to the price and quantity of tires sold. Would the amount of tax paid by the consumer (as opposed to the producer) be greater when demand is elastic or inelastic? Why?
111) Assume the cross price elasticity of demand between peanut butter and grape jelly is negative.
a. Does the cross price elasticity coefficient indicate that peanut butter and grape jelly are substitutes or complements? Why?
b. Describe the effect associated with an increase in the price of peanut butter on the the demand for both peanut butter and grape jelly.
112) Assume an individual is currently using all of his income to consume two goods — X and Y. If the prices of X and Y are $3 and $8, respectively, and the marginal rate of substitution of X for Y is four, is this individual maximizing his net benefits from consumption? If not, what should he do to increase his total utility?
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