1. EC102: CLASS 3 Christina Ammon

2. Elasticities  Own price elasticty =the percentage change in the quantity demanded of a good when its price changes by 1 per cent  Types of Elasticities 1. Own-price elasticity 2. Cross-price elasticity 3. Income elasticity  Own price point elasticity:  ε = -(1/s)(P/X)

3. Question 1  In Côte d’Ivoire the own-price elasticity of demand for beef is 1.91. If the price of beef rises by 10 per cent, the quantity demanded of beef: Rises by more than 10 per cent Falls by less than 10 per cent Falls by more than 10 per cent Rises by less than 10 per cent

4. Question 1  Elatsticity= % change in Q/1% change Price   % change price* elasticity=% change Quantity   10%*1.91=19.1%

5. Question 2  Assume that the point elasticity of the demand for cars to own- price is 1.5. Currently 10 thousands cars are sold for 30 thousands pounds each. This implies that the slope of the demand for cars is: 2 -2 0.5 -0.5

6. Question 2  Use ε = -(1/s)(P/X)   ε*(X/P)=-(1/s)   10000/30000*1.5=0.5=-(1/s)   s=-2

7. Question 3  A Bosnian lawyer explains: “Smoking is a Bosnian tradition. If you had coffee, you had cigarettes; if you had cigarettes, you had coffee”. According to this statement, the cross-price elasticity of the demand for coffee with respect to the price of cigarettes in Bosnia is: Positive Negative Zero 

8. Question 3  Cross price elasticity is the percentage change of quantity demanded of one good if price changes of another good  What happens to the demand of coffee if the price of cigarettes goes up?  => Cross price elasticity is negative

9. Consumption-Leisure Model - Assumptions  Consumer receives utility from consumption and leisure  Always in Economics – resources are scarce  Here – limited number of hours per day  T => l=T-n  Price of consumption:  Price of leisure:  => Budget constraint:

10. Finding the labour supply  What is the optimality condition now?  How do we find the labour supply?  When would the labour supply be upward sloping?  When would it be downward sloping?  What is the substitution effect?  What is the income effect?

11. Question 4  “When the tax on wage income goes up, it is rational for workers to work less”. According to the Consumption-Leisure Model, the foregoing statement is: Necessarily false Necessarily true Neither necessarily true nor necessarily false

12. Income Effect > Substitution Effect

13. Income Effect < Substitution Effect

14. Question 5  It is sometimes argued that unemployment benefits make people decide not to work at all and live on those benefits instead. In the Consumption-Leisure Model this is: Impossible as people like to work Impossible as people like a balanced consumption-leisure bundle Possible

15. Question 5

16. Question 6  Here you see Michel’s demand curve for football matches.  When the price per match falls from £8 to £6, his welfare: Rises by £16 Falls by £16 Rises by £12 Falls by £12

17. Question 7  As a result of the tax: The welfare of fans increases and the welfare of the FA decreases The welfare of fans decreases and the welfare of the FA increases Both fans and the FA lose welfare but the government raises enough tax revenues to compensate them Both fans and the FA lose welfare and the government does not raise enough tax revenues to compensate them Both fans and the FA gain welfare

18. Question 7  Fans (consumer surplus) =  A+ B = (8-6)x(6-0) + [(8- 6)x(10-6)]/2 =16  FA (producer surplus) =  C+ D = (6-4)x(6-0) + = [(6- 4)x(10-6)]/2 =16  Total loss = 32  Tax revenues =  A + C = (8-6)x(6-0) +(6- 4)x(6-0) = 24  Dead weight loss= 32-24=8

19. Question 8 “In a truly great company profits and cash flow become like blood and water to a healthy body: They are absolutely essential for life but they are not the very point of life.” (Jim Collins)

20. Alternative statement  Pursuing objectives of Corporate Social Responsibility (CSR) may not be detrimental to profits.  No, because: Corporate social responsibility usually increases costs Can reduce demand - you might purposefully not sell to certain groups or not use certain advertisement  But: What happens if consumer’s care about CSR Can shift out demand curve – can sell more Can change the slope of the demand curve – can charge a higher price