Download Answers to pause for thought questions

Chapter 3
Answers to pause for thought questions
p68
Will a general item of expenditure like food or clothing have a price-elastic or
price-inelastic demand?
Price inelastic, for two reasons. First, and most important, there will be very few
substitutes. Second consumers will tend to spend a significant proportion of their
income on these broadly defined items.
p70
If a firm faces an elastic demand curve, why will it not necessarily be in the firm’s
interests to produce more? (Clue: you will need to distinguish between revenue and
profit. We will explore this relationship in the next chapter.)
Even though an increase in production will lead to an increase in revenue for the
firm, costs may increase by more than revenue, thereby reducing the firm's profits.
The issue, then, is whether revenue increases more than costs (in which case the
firms will increase its profits by producing more), or less than costs (in which case
the firm would see a fall in profit by producing more).
p74
Two customers go to the fish counter at a supermarket to buy some snapper.
Neither looks at the price. Customer A buys 1 kilo of snapper. Customer B orders
$20 worth of snapper. What is the price elasticity of demand of each of the two
customers?
The elasticity of demand for Customer A is zero. In other words, that person’s
demand for snapper is independent of the price. If the price was different from the
actual price, Customer A would still buy 1 kilo.
The elasticity of demand for Customer B is –1. In other words, if price were 10 per
cent higher than the actual price, 10 per cent less snapper would be bought in order
to keep the amount spent constant (at $20).
p87
Draw a supply and demand diagram with the price of labour (the wage rate) on the
vertical axis and the quantity of labour (the number of workers) on the horizontal
axis. What will happen to the employment of this type of worker if an industrial
tribunal raises wages from the equilibrium to some minimum wage above the
equilibrium?
See Diagram 3.1, which is similar to Figure 3.00 on page 00 of the text, only the
wage rate is plotted on the vertical axis and the horizontal axis plots the quantity of
workers rather than the quantity of goods. Employment will fall to Qd workers. The
supply of workers will rise to Qs. There will thus be unemployment (a surplus of
workers) of Qs minus Qd.
W
S
surplus
minimum
wage
We
D
O
Qd
Qs
Quantity of workers
Diagram 3.1 Effect on employment of a minimum wage