Question

21. The price elasticity of demand for Dell computers is estimated to currently be –3. Assuming that this estimate is correct, which of the following is true?

A. Total revenue from the sale of its computers will increase this year if Dell raises its prices this year.

B. If Dell lowers the price of its computers, the total revenue from sale of its computers will decrease this year.

C. There will be no effect on its total revenue from the sale of its computers this year if Dell lowers its prices.

D. If Dell lowers the price of its computers, the total revenue from the sale of computers will increase this year.

22. Suppose you run a movie theater and want to increase the total revenue you take in during daytime showings of movies. You can increase your revenue by

A. lowering the price of tickets if the demand for tickets is elastic.

B. lowering the price of tickets if the demand for tickets is inelastic.

C. lowering the price of tickets if the demand for tickets is unit elastic.

D. raising the price of tickets if the demand is inelastic. E. either A or D. 11

23. The long-run supply curve of new automobiles is perfectly elastic. If a 10 percent excise tax is levied on automobiles and collected from manufacturers, then in the long run, other things being equal,

A. the tax will be fully shifted to buyers of automobiles as the market equilibrium price of automobiles increases by 10 percent.

B. the tax will be borne entirely by manufacturers and the net price they receive from selling each automobile will be 10 percent less because of the tax.

C. buyers and sellers of automobiles will share the tax on each automobile.

D. it is not possible to forecast the impact of the tax on the market price of automobiles.

Answer 1

21.D. If Dell lowers the price of its computers, the total revenue from the sale of computers will increase this year.
e(d) = -3;
|e(d)| = 3;

Since 3 > 1, demand is price elastic. This implies price and total revenue have inverse relation. If price increases, total revenue will decrease and if price decreases, total revenue will increase.

Relation between price and total revenue:

(a) If e > 1, or, the demand for the good is rela­tively elastic, an inverse relation between p and TR is obtained, and a direct relation between q and TR.

(b) If e < 1, or, demand is relatively inelastic, a direct relation between p and TR is obtained, and an in­verse relation between q and TR.

(c) If e = 1, or, demand is unitary elastic, a change in p and the resulting change in q cannot influence TR.

22. E. either A or D.

Relation between elasticity and total revenue can be summed up as follows:

	Increase in price	Decrease in price
Price Elastic	Revenue falls	Revenue rises
Price Inelastic	Revenue rises	Revenue falls

23. A. the tax will be fully shifted to buyers of automobiles as the market equilibrium price of automobiles increases by 10 percent.

Incidence of taxation depends on elasticity of demand and supply curves. If demand curve is perfectly inelastic or supply curve is perfectly elastic, the entire burden is shifted on the buyers. If demand curve is perfectly elastic or supply curve is perfectly inelastic, the entire burden is shifted on the sellers.If both curves are perfectly elastic, the burden is shared equally among buyers and sellers.