In Micro Economics?
A) Explain the workings of a price floor?
B) For the 3 elasticities of demand, show the formula and explain what it means.
C) Under what what conditions will a price reduction lead to an increase in a firm's revenue??
Answer:
A) The working of a Price Floor. First off a price floor is when the government set the legal price in market so that a firm can't sell the product below the set price. Example - Minimum wage.
So when you graph the supply and demand curve and find the equilibrium price, the price floor would be higher than equilibrium. As you would see on a graph it causes the quantity supplied to be greater than the quantity demanded which in turn causes a surplus of goods.
B) Elasticity of Demand is the ratio of the
%Δ Quantity demanded/ %ΔPrice
The elasticity will be one of three states. Inelastic, unitary, or elastic.
When this ratio is below 1 then it is considered inelastic. When it equals one the it is unitary and when it is above then it's elastic.
C) You have to remember what a firm's total revenue is.
%ΔTotal Revenue = %Δ Price + %Δ Quantity
So if the Total Revenue is increasing while the price decreases then the quantity has to increase a lot more than the price decreases.
Let's say TR increase by 5% when the Price drops by 2%. According to the equation above the quantity would have to increase by 7%.
If you look at elasticity... 7%/5% would be a number greater than one. So it must be elastic.
The answers post by the user, for information only, FunQA.com does not guarantee the right.
More Questions and Answers: