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Chapter Exercises
4.10 The demand for canal transportation was more inelastic after the development of regional railroads than before. Do you agree? Explain. 4.11 Suppose that the market for illegal drugs is perfectly competitive. Suppose further that domestic crime rates are positively related to the value of illegal drug sales and that the demand for drugs is price inelastic. The government’s primary weapon in the war on drugs is to interdict then flow into the country from outside its borders. What is the likely effect of interdiction on domestic crime rates? Do you support such a policy? What alternative approach to the war on drugs would you recommend? 4.12 A monopolist would never produce a good along the inelastic portion of a linear demand curve. Do you agree? Explain. 4.13 A consortium is formed of the world’s leading oil producers form a cartel to control crude oil supplies and international oil prices. The objective of the cartel is to reduce output, raise prices, and increase cartel revenues. Under what circumstances will the cartel’s efforts be successful? Do you believe that this is a realistic scenario? 4.14 The world’s leading coffee bean producers form a cartel to control coffee bean supplies and international coffee prices. The objective of the cartel is to increase output, lower prices, and increase cartel revenues. Under what circumstances will the cartel’s efforts be successful? Do you believe that this is a realistic scenario? 4.15 Suppose that the demand equation for a firm’s product has been estimated as Qx = 100P-3.5I0.25, where P and I are price and income, respectively. a. What, if anything, can you say about the price elasticity of demand for good X? b. What, if anything, can you say about the income elasticity of demand for good X? c. What, if anything, can you say about the relationship between the slope of the demand curve and the price elasticity of demand? d. What, if anything, can you say about the effect of a price decrease on firm revenues? e. How would your answer to part c be different if the demand equation had been linear?
CHAPTER EXERCISES 4.1 The Sylvan Corporation has estimated the price elasticity of demand for synthetic wood sorrel to be -0.25. a. If the price of Sylvan wood sorrel increases by 10%, what will happen to the quantity demanded of wood hewers? b. What will happen to Sylvan’s revenues as a result of the price increase?
