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Aplia: Student Course Ho courses aplia.com/afsen e Need Help Graphing This xG conjunction Google Sea × 01 Lived OneRepublic x - D courses aplia.com/af servlet/cmserver?ctx=malklat sandhul 0077&ctx-malkiat; sandhul 0077&cms; action-getFile&material-id;= 2147136659 Roland - 0.2) One can gain insight by manipulating the price elasticity of demand equation. With the information provided below, demonstrate what happens in the specific markets Suppose there is a technological change that allows manufacturers to make Android smartphones much more cheaply. In fact, the retail price falls by 25%, ceteris paribus i) If the price elasticity of demand is -0.8, how much does the quantity demanded a) change? ii) Statement: the producers are definitely better off True, false, uncertain, or not enough information? Why? (Hint: recall elasticity-total revenue table in lecture. Simple way is to construct a numerical example... i.e where the initial price is S100, while initial quantity is 100 units. ) b) In an alternative scenario, ceteris paribus, suppose there is a new tax on data usage The cum-tax monthly bill increases by 15% 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? Why? (Hint: recall elasticity-total revenue table in lecture. Simple way is to construct a numerical example... i.e where the initial price is S100, while initial quantity is 100 units. )

Explanation / Answer

(a)

(i) Price elasticity of demand = - 0.8

So, if price decreases by 1%, quantity demanded increases by 0.8%

If price decreases by 25%, quantity demanded increases by (25 x 0.8) = 20%

(ii) FALSE

Absolute value of price elasticity = 0.8 which is less than 1. So, demand is inelastic.

When demand is inelastic, a decrease in price decreases total revenue, which makes producers worse-off.

(b)

Price increases by 15%.

(i) Price elasticity of demand = - 0.45

So, if price increases by 1%, quantity demanded decreases by 0.45%

If price increases by 15%, quantity demanded decreases by (15 x 0.45) = 6.75%

(ii) FALSE

Absolute value of price elasticity = 0.45 which is less than 1. So, demand is inelastic.

When demand is inelastic, an increase in price increases total revenue, which makes producers better-off.

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