True/False/Uncertain. Evaluate whether the following statements are true, false

Question

True/False/Uncertain. Evaluate whether the following statements are true, false or uncertain. Again, make sure to explain your reasoning

a. If a drop in the price of smartwatches from $250 to $200 increases the quantity sold from 10,000,000 to 11,000,000 demand is price inelastic.
b. In the presence of a negative externality, a competitive market produces too much of the good.
c. In his article “Smoking’s Internalities” Jonathan Gruber argues that the optimal tax on cigarettes might be considerably lower than the external marginal cost of a pack of cigarettes.

Explanation / Answer

a) Ed = P/Q x Change in Q/Change in P

Ed = 250/10,000,000 x (11,000,000 - 10,000,000)/(200 - 250)

= 250/10,000,000 x 1,000,000/-50 = - 5/10 = - 0.5 < 1

Therefore, demand is price inelastic.

True statement.

b) True statement

When action of one economic agent creates cost for others then it is known as negative externality. There is overproduction of good under this.

c) Article is missing.

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