Question

In: Economics

13. Explain why the supply of an item with a large number of production substitutes will...

13. Explain why the supply of an item with a large number of production substitutes will likely have an elastic supply.





14. Use the concept of elasticity of supply to explain why antique furniture is so expensive.




15. Explain why a tax on cigarettes is likely to increase the government’s tax revenues.

Solutions

Expert Solution

13) An item with many substitutes can easily be given up as its price decreases/ cost increases in order to produce a more viable substitute. This means that the responsiveness of supply  for that item is very high with changes in its price. Therefore, it is likely to have an elastic supply.

14) Antique furniture is exclusive in the sense that it is very rarely available, making its supply scarce. This causes its supply curve to be towards the far left and its price to be very high.

15) Cigarette consumption is addictive and can't be given up easily even when the price rises. This makes its demand quite inelastic. So, when a tax is imposed on it, its effective price increases, but the extent of decline in the quantity demanded is less than the extent of the price rise. This leads to an increase in the total government revenue as the tax is imposed on the total value of consumption given by the product of the price and the quantity.


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