Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

60 THE MEASUREMENT OF ELASTICITIES [CHAP. 3
(b) The answers are given in Table 3.22.
Table 3.22
Commodity DQ, % Commodity DQ, % Commodity DQ, %
Beef 9.2 Beef 2.8 Butter 4.2
Potatoes 3.1 Butter 6.7 Margarine 2 2.0
Sugar 3.1 Cheese 26.1 Meat 3.5
Electricity 12.0 Sugar 22.8 Electricity 2.0
Restaurant meals 22.7 Electricity 2.0 Restaurant meals 14.8
3.25 Should a producer, facing a negatively sloped demand curve for the commodity sold, operate in the
inelastic range of the demand curve? Why?
No: as long as e , 1, the producer can increase the total revenue simply by increasing the commodity price. In
addition, if the producer increases the price, less of this commodity will be consumed. The result would be a
smaller output and smaller total costs of production. With total revenues rising and total costs falling, the producer’s
total profits (TR 2 TC) increase.
3.26 As a result of the high wage settlement in the New York City taxi strike of several years ago, taxi owners
increased taxi fares. Was this the right decision?
The answer depends on the price elasticity of demand for taxi rides in New York City. If the demand for taxi rides is
price-inelastic, the decision was correct (see Problem 3.25). If demand is elastic, then increasing taxi fares reduces
the total revenue of taxi owners. In order to see what happened to the total profits of taxi owners, we must compare
this decrease in total revenue with the change in total costs (higher wages for taxi drivers but fewer taxis and fewer
taxi drivers).
Unfortunately, in the real world we often do not have (and it might be difficult) to get estimates of the elasticities
necessary to reach correct decisions.
3.27 Prove the following results, assuming straight-line demand and supply curves, (a) For a given supply
curve and a given equilibrium point, the more inelastic the demand curve, the greater the burden of a
per-unit tax on the consumer. (b) For a given demand curve and a given equilibrium point, the more
elastic the supply curve, the greater the burden of a per-unit tax on the consumer.
(a) In Fig. 3-17, S 0 is the market supply curve after the imposition of a per-unit tax on producers. D 1 ,D 2 , and D 3
are three alternative demand curves for the commodity. At the original equilibrium point (E), D 1 is more
elastic than D 2 and D 2 is more elastic than D 3 . Thus given the supply curve, the more inelastic the
demand curve, the higher the new equilibrium price (after the imposition of the per-unit tax) and the
greater the burden of the tax on consumers.
Fig. 3-17 Fig. 3-18