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    Tutorial 3

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    Mustolih Hery Saputro
    This document provides an overview of tutorial exercises for a university course on managerial economics. It discusses key concepts related to elasticity, including own-price elasticity of demand, measurement of elasticity, cross-price elasticity of demand, and income elasticity of demand. It then presents 5 tasks that involve applying these elasticity concepts to analyze scenarios about demand for goods and the impacts of taxes. The tasks examine elasticities for air travel, chocolate bars, and cocaine and ask students to determine equilibrium prices and quantities, impacts of taxes, and which policies would be most effective for reducing cocaine consumption.

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    Tutorial 3

    Uploaded by

    Mustolih Hery Saputro
    84 views3 pages
    This document provides an overview of tutorial exercises for a university course on managerial economics. It discusses key concepts related to elasticity, including own-price elasticity of demand, measurement of elasticity, cross-price elasticity of demand, and income elasticity of demand. It then presents 5 tasks that involve applying these elasticity concepts to analyze scenarios about demand for goods and the impacts of taxes. The tasks examine elasticities for air travel, chocolate bars, and cocaine and ask students to determine equilibrium prices and quantities, impacts of taxes, and which policies would be most effective for reducing cocaine consumption.

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    This document provides an overview of tutorial exercises for a university course on managerial economics. It discusses key concepts related to elasticity, including own-price elasticity of demand, measurement of elasticity, cross-price elasticity of demand, and income elasticity of demand. It then presents 5 tasks that involve applying these elasticity concepts to analyze scenarios about demand for goods and the impacts of taxes. The tasks examine elasticities for air travel, chocolate bars, and cocaine and ask students to determine equilibrium prices and quantities, impacts of taxes, and which policies would be most effective for reducing cocaine consumption.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    84 views3 pages

    Tutorial 3

    Uploaded by

    Mustolih Hery Saputro
    This document provides an overview of tutorial exercises for a university course on managerial economics. It discusses key concepts related to elasticity, including own-price elasticity of demand, measurement of elasticity, cross-price elasticity of demand, and income elasticity of demand. It then presents 5 tasks that involve applying these elasticity concepts to analyze scenarios about demand for goods and the impacts of taxes. The tasks examine elasticities for air travel, chocolate bars, and cocaine and ask students to determine equilibrium prices and quantities, impacts of taxes, and which policies would be most effective for reducing cocaine consumption.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    UNIVERSITY OF MELBOURNE

    DEPARTMENT OF ECONOMICS

    ECON90015 Managerial Economics


    Semester 2, 2018

    Tutorial Exercise 3: Elasticity and applications

    KEY CONCEPTS:
    Elasticity
    Own-Price elasticity of demand
    Measurement of elasticity
    Arc and Point Elasticity
    Cross-price elasticity of demand
    Income elasticity of demand
    Own-price elasticity of supply
    Indirect tax
    Tax incidence

    Task 1

    Refer to Tutorial Exercise 2, Task 2(d).

    Task 2

    Say whether each of the following statements is correct or incorrect. Explain your
    answer.

    a) Food and clothing are necessary goods. Hence, demand for those goods will show
    a greater degree of responsiveness to price (higher own-price elasticity) than for
    other goods such as attendance at sporting events or music concerts.

    b) Demand for motor vehicles exhibits positive income elasticity. This means that
    there are no close substitutes for motor vehicles.

    c) Over a relatively short time horizon, the demand for petrol is likely to be inelastic
    with respect to price. But over the longer term, as motor vehicle owners have the
    scope to change to other types of fuel such as natural gas, demand for petrol will
    be more elastic with respect to price.

    1
    Task 3

    Suppose that business travellers and holiday-makers have the following demand
    schedules for air tickets for travel from Melbourne to Sydney:

    Quantity Demanded Quantity Demanded


    Price ($)
    (Business travelers) (Holiday makers)
    100 2300 1750
    200 2100 1250
    300 1900 750
    400 1700 500

    a) Suppose the price increases from $200 to $300. What is the (arc) own-price
    elasticity of demand for: (i) business travelers; and (ii) holiday makers?

    b) Why might holiday makers have a different own-price elasticity of demand to


    business travelers?

    Task 4

    Consider the following demand and supply schedule for chocolate bars.

    Price Quantity Demanded Quantity Supplied


    (cents per bar) (bars) (bars)
    90 100 160
    80 110 150
    70 120 140
    60 130 130
    50 140 120
    40 150 110
    30 160 100

    a) What is the equilibrium price and quantity traded of chocolate bars?

    b) Suppose the government imposes a tax of 20 cents on the production of each


    chocolate bar. What is the price paid by consumers, the price received by
    producers, and the quantity of chocolate bars sold? What is the difference between
    the price paid by consumers and the price received by producers? Has the quantity
    of chocolate bars sold increased or decreased? Illustrate with a supply and
    demand curve diagram.

    c) How much of the tax is paid by the consumer and how much by the producer?
    What is the amount of tax revenue collected by the government?

    d) Suppose the price elasticity of demand was perfectly elastic, while supply is
    relatively price inelastic. Who bears a greater burden of the tax, consumers or
    producers? Illustrate with a supply and demand curve diagram. Explain.

    2
    Task 5

    Dan and Sue are discussing the recent seizure by police in Sydney of 240 kilograms
    of cocaine smuggled into the country from Mexico, and the detrimental effects of the
    drug on the health and welfare of young people.

    Dan says: “The most effective way to reduce the consumption of cocaine is to increase
    the number of customs inspectors and police officers devoted to preventing the
    imports of cocaine. This would reduce the availability of cocaine on the Australian
    market.”

    Sue disagrees and says: “A more effective policy would be to launch a national
    educational campaign warning young people about the health risks associated with
    the use of cocaine.’:

    Assume that the demand for cocaine is inelastic and the supply of cocaine is elastic.

    Who is correct and/or incorrect? Explain your answer.

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