Economics 1A Assignment 2
Question 1 P
P
P2
P1
D2
0 0 D1
Q Q
Q2 Q1
Sugar
Molasses
-If the price of molasses increases, the quantity demanded for sugar will, ceteris paribus, decrease and
the demand for sugar will increase at every price level. The demand curve for sugar will shift to the right.
Question 2
2. Clothes (elasticity coefficient greater than 1) = 1,25, Cigarette (elasticity coefficient less than 1) =-0,87
2.1 Cigarettes are relatively inelastic, the change in the demand of a product is less than that of change
in its price.
Clothes are relatively elastic, the percentage change in the quantity demanded of the product is greater
than the percentage in its price.
2.2. Inelastic Goods
• Large price changes induce only small changes in the quantity demanded.
• There are no close substitutes for cigarettes.
• They are addictive (cigarettes)
Elastic Goods
• The percentage change in the quantity demanded of clothes is greater than the percentage in its
price.
• Clothes are bought frequently.
• There are many substitutes for clothes, consumers have many alternatives.
, P P
2.3
16
8
12
6
P
P Q
80 100 Q 84 88
Elastic Demand for Inelastic demand for
clothes Cigarettes
2.4. With clothes (elastic goods), the company can cut its price, the percentage will drop and that will
result in an even larger percentage increase in the quantity sold, thus raising total revenue.
If the price for Cigarettes is increased the demand does not change, the Total revenue increases due to
the higher price and static quantity demanded. This means that firms that deal with cigarette can
increase prices, selling a little less but making higher revenues.
2.5. Excise/Sin tax- as excise tax increases, the price of cigarette also increases.
Trade discounts by manufacturers- cigarette manufacturers use discounts and other promotions to
counteract the effects of these tax increases.
Mark-up- state cigarette minimum price laws typically require a minimum percentage of markup to be
added to the retail price.
Minimum retail price- the state minimum prices prohibit manufacturers to give trade discounts or
reduce prices.
Question 3
Number of Coca Colas Marginal Utility Total Utility
consumed
1 30 30
2 20 50
3 15 65
5 16 81
8 6 87
Question 1 P
P
P2
P1
D2
0 0 D1
Q Q
Q2 Q1
Sugar
Molasses
-If the price of molasses increases, the quantity demanded for sugar will, ceteris paribus, decrease and
the demand for sugar will increase at every price level. The demand curve for sugar will shift to the right.
Question 2
2. Clothes (elasticity coefficient greater than 1) = 1,25, Cigarette (elasticity coefficient less than 1) =-0,87
2.1 Cigarettes are relatively inelastic, the change in the demand of a product is less than that of change
in its price.
Clothes are relatively elastic, the percentage change in the quantity demanded of the product is greater
than the percentage in its price.
2.2. Inelastic Goods
• Large price changes induce only small changes in the quantity demanded.
• There are no close substitutes for cigarettes.
• They are addictive (cigarettes)
Elastic Goods
• The percentage change in the quantity demanded of clothes is greater than the percentage in its
price.
• Clothes are bought frequently.
• There are many substitutes for clothes, consumers have many alternatives.
, P P
2.3
16
8
12
6
P
P Q
80 100 Q 84 88
Elastic Demand for Inelastic demand for
clothes Cigarettes
2.4. With clothes (elastic goods), the company can cut its price, the percentage will drop and that will
result in an even larger percentage increase in the quantity sold, thus raising total revenue.
If the price for Cigarettes is increased the demand does not change, the Total revenue increases due to
the higher price and static quantity demanded. This means that firms that deal with cigarette can
increase prices, selling a little less but making higher revenues.
2.5. Excise/Sin tax- as excise tax increases, the price of cigarette also increases.
Trade discounts by manufacturers- cigarette manufacturers use discounts and other promotions to
counteract the effects of these tax increases.
Mark-up- state cigarette minimum price laws typically require a minimum percentage of markup to be
added to the retail price.
Minimum retail price- the state minimum prices prohibit manufacturers to give trade discounts or
reduce prices.
Question 3
Number of Coca Colas Marginal Utility Total Utility
consumed
1 30 30
2 20 50
3 15 65
5 16 81
8 6 87
