Posted: September 18th, 2017
Elasticity of demand.
a) Distinguish between an increase in demand and an increase in quantity demanded. Show each graphically.
b) Illustrate the impacts of a price ceiling and a price floor in a market. Give an example of each type of price restriction. What problems arise from such intervention in the market?
QUESTION 2 (20 marks)
a) Explain the 3 different types of elasticity of demand.
b) Use supply and demand analysis to illustrate the effects of a specific or per unit tax on consumers and producers of petrol. In your answer, address the following points:
i. Is demand for petrol elastic or inelastic with respect to its price? Explain your answer.
ii. Does the price to the consumer rise by the full amount of the tax?
iii. What determines the incidence or the burden of the tax?
c) Initially the demand curve for a commodity is given by the equation P=100-4Q. Assume that there is an increase in demand so that the new demand equation becomes P=100-2Q. Answer the following questions:
i. Does the second demand curve illustrate a different elasticity of demand? Explain your answer.
ii. Suppose that there is a further increase in demand so that the new demand equation becomes P=150-4Q. After this particular demand change will elasticity of demand be different at each price level?
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