Question

Suppose the price elasticity of demand for smartphones is 0.5 (absolute value), while the price elasticity of supply is 1.9.

a) Are the demand and supply of smartphones price elastic or price inelastic? Briefly explain.

b) In order to increase total revenue, should the sellers of smartphones raise or cut the price? Explain with a diagram.

c) If the government imposes a per-unit tax of $100 on the sellers of smartphones, how will the price and quantity transacted of smartphones change? Will the sellers or the buyers bear a larger tax burden? Will the market be able to achieve economic efficiency after the tax is imposed? Explain with a diagram.

Answer 1

(a) Price elasticity of demand for smartphones = 0.5 .

Price elasticity of supply for smartphones = 1.9

Demand of smartphones is price inelastic because it is less than 1.

And supply of smartphones is price elastic because it is more than one.

(b) Because demand is inelastic ,therefore, in order to increase total revenue , sellers should raise the price . As a result ,price increase by large amount than the decrease in quantity, and therefore, total revenue will increase. This is shown in the below figure:

(c) After the imposition of tax of $100 on the sellers of smartphones, supply curve will shift to the left. Because of this the equilibrium price of smartphones rises and equilibrium quantity of smartphones falls. Buyers bear a larger tax burden because of the inelastic demand curve. No, the market is not able to acgieve economic efficiency because there is deadweight loss occur in the economy (It is shown the area of the triangle).