ECON 200 Lecture Notes - Lecture 4: Midpoint Method

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beigelion235

13 Sep 2016

School

University of Maryland

Department

Economics

Course

ECON 200

Professor

Robert Schwab

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Document Summary

The price elasticity of demand of demand describes the size of the change in the quantity demanded of a good or service when its price changes. It is equal to the percentage change in quantity demanded divided by the percentage in price. In 2014 berkeley, ca passed the first tax on soft drinks in the us. The purpose of the tax is to reduce the consumption of soft drinks in an effort to combat obesity. A recent study concluded that as a result of the tax. The price of soft drinks in berkeley rose by about 7% There was a 21% reduction in soft drink consumption in low income berkeley neighborhoods. Implies a price elasticity of -21%/7% = -3. Want to come back to the berkeley soft drink tax a little later in the semester. Use the mid-point method to find the price elasticity of demand when price rises from.

Related Questions

Use the following table for this question

Good Own Price Elasticity of Demand

Cigarettes -0.50

Alcohol -1.00

Soft Drink -1.50

(a) If the government could raise taxes on one good, which product should the government increase tax rates to raise tax revenue? Briefly explain why.

(b) Which of the three products has a unitary elastic demand curve?

(c) If the government wants to decrease the quantity consumed of cigarettes by 20%, what percentage of tax would they have to levy on cigarette consumption? Show your work.

(d) If the government wants to decrease the quantity consumed of alcohol by 20%, what percentage of tax would they have to levy on alcohol consumption? Show your work. (e) If the government wants to decrease the quantity consumed of soft drinks by 30%, what percentage of tax would they have to levy on soft drink consumption? Show your work.

orchidraven338

Use the following table for this question
the Good Own Price Elasticity of Demand
Cigarettes -0.50
Alcohol -1.00
Soft Drink -1.50
(a) If the government could raise taxes on one good, which product should the government increase tax rates in order to raise tax revenue? Briefly explain why.
(b) Which of the three products has a unitary elastic demand curve?
(c) If the government wants to decrease the quantity consumed of cigarettes by 20%, what percentage of tax would they have to levy on cigarette consumption? Show your working.
(d) If the government wants to decrease the quantity consumed of alcohol by 20%, what percentage of tax would they have to levy on alcohol consumption? Show your working.
(e) If the government wants to decrease the quantity consumed of soft drink by 30%, what percentage of tax would they have to levy on soft drink consumption? Show your working.

Use your knowledge about price-searching firms and two-part pricing to advise the company below. A company has a bar and is trying to decide on the cover charge (if any) and price for each drink. It has done a modest regression study in which it asked customers to classify themselves as light drinkers or heavy drinkers and to indicate the number of drinks they would typically consume during the evening. The estimate from the regression study is that a change in the price equal to $1 per drink causes light drinkers to change their consumption on average by 0.5 drinks per night. However, a change in the price of $1 causes heavy drinkers to change their consumption on average by 1.0 drinks per night. For both groups, a typical consumer will not consume anything once the price reaches $9 per drink. (They may instead go to another bar or not go to a bar at all.) Draw a demand curve for a typical light drinker and for a typical heavy drinker on the same diagram. Explain your diagram. Write equations for the curves in slope-intercept form.

If 300 people visit the bar on a typical evening, with 200 people being light drinkers and 100 people being heavy drinkers, draw an overall demand curve for all of the consumers combined. What is the slope and what is the intercept for this demand curve? Write an equation in slope-intercept form. If the marginal cost of making drinks (the alcohol, the bartender's labor, and the amortized cost of purchasing glasses and cleaning them repeatedly) is constant at $5 per drink, and if no cover charge is assessed, what is the best price to charge for drinks? How many drinks would be sold on a typical evening? What would your profits be? If you cut your price by $1 per drink and assess the maximum possible cover charge without causing a typical light drinker to refuse to enter the bar, would your profits improve? How high would the cover charge be? Calculate both the cover charge and your total profits. Would the new pricing increase profit?

Maybe the best price cut is not exactly $1. Write a profit equation. Profits equal to total revenue minus total cost. Total cost equals $5 times the number of drinks sold. Total revenue equals the price for drinks times the number of drinks sold, plus 300 people times the cover charge. The cover charge equals, for a light drinker, the triangle of consumer surplus above the price but below the demand curve for a light drinker. (The area of a triangle equals one half the base times the height.) You will take the derivative of the profit equation with respect to P or Q and set it equal to zero. For example, use the equation for the total demand curve and solve for Q in terms of P. Then in the profit equation substitute in an expression involving P in place of every Q that was in the original profit equation. Now you can take a derivative of profits with respect to P and set the derivative equal to zero. Eventually, you can solve for the exact best P, Q, and cover charge.

Review of the slope-intercept form: Y= a - bX; a = the intercept on the Y-axis and b = the absolute value of the slope (slope=(change in Y)/(change in X)) For a demand curve: P=a-b Q. The intercept on the vertical axis would indicate a price that is so high that the quantity demanded becomes zero. The slope is the ratio of a change in price divided by the change in quantity demanded; the extra credit problem gives you information to determine the slope for a light drinker and the slope for a heavy drinker.

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ECON 200 Lecture Notes - Lecture 4: Midpoint Method

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