Question

Please answer all four questions, thanks!!!

5. An often prevailing belief is that when producers experience an increase in cost, including an increase in taxes, they escape the increase by simply “passing it on” to consumers. When might this work? When might this not work? Explain.

6. With the passage of time, supply becomes progressively more and more elastic because with the passage of time consumers have the opportunity to cultivate more and more substitutes for a product. True or false? Explain.

7. What is consumer surplus? Do consumers always get to keep it? Might there ways for sellers to capture some of this consumer surplus for themselves?

8. If the coefficient of cross elasticity of demand is negative this means that the goods involved are substitutes. True or false? Explain.

Answer 1

5) The producers experience an increasing cost the transfer for pass of the taxes to the consumers in order to maximize their profit .But there are certain conditions under which this is done under which it is not successful.

In case the demand for the good is inelastic that is even large change in price would change the quantity by small level this would mean that even if produces decide to transfer a majority of the burden of taxes on the consumers the revenue generated would still not reduce because of inelastic demand.

On the other hand if the demand for the good is elastic that is there are various substitute available for the consumer can easily for the consumption of that good then a small increase in price could lead to large change in quantities and hence in such a case it is the supplier or producer who needs to take on the brunt of taxes.

6) with the passage of time supply becomes more and more elastic this is not because of available substitute to the consumers rather it is because of available of substitute to producers. This means that as the time passes the producers would have more resources to switch between products aur more time to increase the capacity of the firm so that more goods or more variety of goods are produced.

Eg: suppose a farmer produces only rice but as the time passes due to mechanization or more resources with the farmer he can expand to you to more variety of crops like including wheat Maize or corn in his production. This would make is supply elastic that is if the price of inputs of a good increases he can shift to another good which is more profitable during that time.

So the above statement is false

7) consumer surplus refers to the difference in the price the market demands (the consumer actually pays) and the consumer is willing to pay.

The consumers might not be able to keep the consumer surplus because the producer would want to extract it. The producer can extract the consumer surplus by charging exactly the consumers willingness to pay which would leave the consumer with no consumer surplus

Yes, there are ways a producer would want to keep the consumer surplus for themselves. Eg: a monopolist. In a Monopoly market the producers can exercise price discrimination that is charging different prices for different consumers this leads to extracting the consumer surplus from all the consumers and increasing the profits of the Monopoly.

Or in case of some businesses like airlines where the firm can practice price discrimination or differential prices based on the age, willingness to pay etc.

8) the coefficient of cross price elasticity of demand is negative it means that and increase in price of good 1 would reduce the quantity demanded of good 2. This occurs when both goods are consumed simultaneously or when the goods are complement in nature.

if the goods are substitute then there is a positive cross price elasticity because as the price of one good increases the demand for a good would increase because they are substituted in place of each other.

show the first statement is false