You have to type all your answers except for
equations or graphs.
In order to reduce teen smoking, the government places a $2 per pack tax on
cigarettes. After one month, while the price to
consumer has increased a great deal, the quantity demanded for cigarettes has
been reduced only slightly.
Is the demand for cigarette over the period of
one month elastic or inelastic? Briefly
Suppose you are in charge of
pricing for a tobacco firm. The
President of your firm suggests that the evidence received over the last month
demonstrates that the cigarette industry should get together and raise the
price of cigarettes further because total revenue to the tobacco industry will
certainly rise. Is the president of your
firm correct? Why?
Suppose the president of your tobacco firm
suggests that your firm should raise the price of your cigarettes independent
of the other tobacco firms because the evidence clearly shows that smokers are
insensitive to changes in the price of cigarettes. Is the president of your firm correct if he
wants to maximize total revenue? Explain
Q2. For each of the following situations,
decide whether the bundle Tom is considering optimal or not. If it is not optimal, how could he improve
his overall level of utility? That is,
determine which good he should spend more on and which good should he spend
- Tom has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters
cost $20 each. He is thinking
about buying 2 pairs of sneakers and 5 sweaters. He tells his friend that the additional
utility he would get from the second pair of sneakers is the same as the
additional utility he would get from the fifth sweater.
- Tom has $5 to spend on pens and pencils. Each pen costs $0.5 and each pencil
costs $0.10. He is thinking about
buying 6 pens and 20 pencils. The
last pen would add five times as much to his total utility as the last