1-Which of the following can explain the volatility of prices in the market for
ID: 1253605 • Letter: 1
Question
1-Which of the following can explain the volatility of prices in the market for oil?a.Both the supply and demand for oil is very inelastic
b.Both the supply and demand for oil is very elastic
c.The desire of oil companies to maximize profits
d. Government price controls
2. Suppose the State of California is considering increasing a tax on hotel rooms by $5. Economists for the state estimate the price elasticity of demand for hotel rooms at -2.5 and the price elasticity of supply for hotel rooms at 0.1. What do we know about the incidence of the tax?
a. Hotel guests will pay most of the tax.
b. Hotel operators will pay most of the tax.
c. Hotel guests and operators will split the tax 50/50.
3. The season tickets for Chiefs, Royals and KU basketball games are substitutes. The cross-price elasticity of demand between the Chiefs and Royals season tickets is 2.5 and the cross-price elasticity of demand between the Chiefs and KU season tickets is 4.5. All else equal, if the Chiefs announce a I0%o decrease in the price of their season tickets, which competitor should be most concerned?
a. The Royals because its demand will be most affected by the price cut
b. KU because its demand will be most affected by the price cut
c. They will both be equally concerned
d. Neither will be concerned since they are all in difFerent markets
Explanation / Answer
1. D. Maybe B. Not too sure Becuase governments put a limit on the amount of oil that can be sold, supply varies from day to day. Although we have enough oil to satisfy the world (ie reserves in Alberta and Saudi Arabia), supply is limited by the gov in order to keep the prices relatviely high. When a crisis happens such as the BP oil crisis, oil companies take a huge hit to profits, therefore reducing their supply and causing prices to increase. 2. A because the price elasticity of demand is negative, it means that consumers will still demand the same amount of rooms no matter how much the price rises. The stupply of the rooms will stay about the same too which means that hotel guests will be paying most of the taxes if they wish to stay at the hotel 3. B because the cross price elacticity is positive, when prices of one dropping means that the demand will shift towards the chiefs instead of buying the royals tickets. Elastic demand = when the number is positive. When the elastic demand is poisitive consumer price sensitivity is relatively high meaning demand will rise with lower prices and decrease with higher prices.
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