Question

Part A

Charles loves Mello Yello and will spend $8 per week on the product no matter what the price.

True or False: Charles’s demand for Mello Yello is unitary elastic.

Part B

Suppose there is a decrease in the demand for high-definition televisions.

The short-run average total cost curve for this product will ________ (Increase/Decrease/Not Change) because:

a. When demand decreases, the short-run average total cost increases.

b. Short-run average total cost depends on workers’ wage rates and the prices of inputs rather than on demand.

c. When demand decreases, the short-run average total cost declines.

Answer 1

Solution.

PART A

The given statement is absolutely true that the Charles's demand for Mello Yello is Unitary Elastic. As per the theory of calculation of price elasticity of demand with Total expenditure method, when there is a change in the price of a commodity (increase or decrease) but the Total expenditure on the commodity remains same or unchanged then this is the case of Unitary price elasticity of demand (elasticity=1). In the given problem Charle's total expenditure remains same at $8 irrespective of price of the commodity, so the Case is unitary elastic.

PART. B

When there is a decrease in the demand of high definition television, the short run average total cost curve for this product will remain unchanged. (Not Change)

Because short run average cost average total cost depends on Workers'wage rate and prices of input rather than on demand.

Demand of a commodity in short run can affect the Price of the commodity in the market but it has no role to play in determination of Average total cost , as this cost is totally dependant on Cost paid to variable factors like wages to labour and payment of Raw materials and other inputs.