Question

14. Suppose the price elasticity of demand is -1.3 for Good A and -2.1 for Good B. Which of the following is consistent with these demand elasticities? a. Good A: Grapes Good B: Fruit b. Good A: Milk over the next year Good B: Milk over the next month c. Good A: Diamond necklaces Good B: Beds d. Good A: Train tickets prior to the invention of automobiles Good B: Train tickets following the invention of automobiles 15. A slightly different feature of labor markets is that employees are the suppliers of labor and firms are the demanders of labor. Assuming an identical inward shift of the demand curve, which market will sustain a higher level of unemployment due to the demand shift, as measured by the number of jobs lost due to the demand shift? Assume that suppliers of labor have market power (for example, the presence of a strong labor union). Price Price Demand Demand 800 1000 400 600 Quantity 0 200 400 600 800 1000 0 200 Quantity a. Market A (left) b. Market B (right) c. There will be an identical change in unemployment

Answer 1

1) The value of price elasticity of good A is -1.3 which means the price elasticity is comparetively more than Good B. Hence, the demand will fluctuate with changes in price. Good A according to the values should be Grapes. The reasons being, that Diamond necklace is highly elastic which means the value of price elasticity would be more than 1. Also, now Good B with -2.1 elasticity means that it is close to necessity. This good is therefore Milk, reason being, milk is a product that is consumed despite increase in the price.

2) The steepness of the MC curve shows the type of market we are dealing with. The steeper the curve is it reflects a monopoly. Hence, when we keep this particular idea in our mind. When there is inward shidt in demand, those working in a monopoly will have a larger effect and hence unemployment rate will be more in monopoly that is Market A (the one with the steeper graph)