ELASTICITY
We can gain insight by manipulating the price elasticity of the demand equation. With the information provided below, demonstrate what happens in the specific markets.
a) Suppose there is a technological change that allows manufacturers to make Android smartphones much more cheaply. In fact, the retail price falls by 15%, ceteris paribus.
i) If the price elasticity of demand is -0.8, how much does the quantity demanded change?
ii) Statement: the producers are definitely better off. True, false, uncertain, or not enough information? Explain why? (Hint: recall elasticity-total revenue table. The simple way is to construct a numerical example i.e., where the initial price is $100, while the initial quantity is 100 units. )
b) In an alternative scenario, ceteris paribus, suppose there is a new tax on data usage. The income-tax monthly bill increases by 10%.
i) If the price elasticity of demand is -0.45, how much does the quantity demanded change?
ii) Statement: the data plan providers are definitely worse off. True, false, uncertain, or not enough information? Explain why? (Hint: recall elasticity-total revenue table. The simple way is to construct a numerical example i.e., where the initial price is $100, while the initial quantity is 100 units. )