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Chapter 5
1.The demand for gasoline is relatively inelastic because if the price of
gasoline rises, many people will continue to buy the good. Thus,
consumers will still have a high quantity demanded for gasoline even
when the price rises. However, the demand for Exxons gasoline is
relatively elastic because there are many other places that sell
gasoline. Such that, if the price of gasoline at Exxon is too high,
consumers will just go to Shell to obtain a lower price of gasoline.
2. There are time periods when dealing with the price elasticity of
supply, such as the market period, short run, and the long run. The
market period impacts the supply curve by having a lag between when
the firm realizes it has a products that become instant hits on its hands
and when inventory can be replaced. The market period is a time
period so short that the output and the number of firms are fixed. The
short run impacts the supply curve from when the firms can employ
more people, have existing employees work overtime, or hire part-time
employees to produce more, but this is done in an existing plant. The
short run is a time period when plant capacity and the number of firms
in the industry cannot change. The long run impacts the supply curve
because existing firms can expand or build new plants, or firms can
enter or exit the industry. The long run is a time period long enough for
firms to alter their plant capacities and for the number of firms in the
industry to change.
3. An excise tax placed on cereal will be less likely to be passed to
consumers than an excise tax on wireless phone and data services.
This occurs because cereal is elastic good and when then price elastic
of demand is elastic, consumers bear a smaller burden of taxes while
more is borne by seller. Whereas, wireless phone and data services are
an inelastic goods and when demands are inelastic, a higher share of
the total tax burden is shifted to consumers.
4. 10%/15%= 67% is the cross elasticity of demand for these two
products. These products are substitutes because the cross elastic of
demand is positive and when the price of chicken rises, the quantity
demanded of turkey will rise, while the quantity demanded of chicken
will decrease.
Chapter 6
5. Sunk costs should not be taken into considerations when making
decisions about the present or the future because a sunk cost is a cost
that has been paid and connect be recovered. This means that the cost