Economics-Microeconomics question.

timer Asked: Oct 16th, 2014

Question description

You have to type all your answers except for equations or graphs.

 Q1. In order to reduce teen smoking, the government places a $2 per pack tax on cigarettes. After one month, while the price to

 the consumer has increased a great deal, the quantity demanded for cigarettes has been reduced only slightly.

a.   Is the demand for cigarette over the period of one month elastic or inelastic?  Briefly explain.  

b.  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? 

c.   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 briefly. 

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 less on.

  1. 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. 
  2. 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 pencil. 

Tutor Answer

(Top Tutor) Studypool Tutor
School: Duke University
Studypool has helped 1,244,100 students
flag Report DMCA
Similar Questions
Hot Questions
Related Tags

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors