David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Review questions
5 Common fallacies Why are these statements wrong? (a) Because cigarettes are a necessity, tax
revenues from cigarettes will always increase when the tax rate is raised. (b) Farmers should take
out insurance against bad weather that might destroy half of all their crops. ( c) Higher consumer
incomes always benefit producers.
6 Suppose that the market demand for beef is given by QD = 200 - 6P + 2 Y, where P is the price of
meat per kg and Yis consumers' income. Suppose that consumers' income is £100. If the price of
beef decreases from £10 to £8 per kg, find the corresponding elasticity of demand. Now suppose
that the price is fixed to £8 while consumers' income increases from £100 to £150; find the
corresponding income elasticity of demand. Is beef a normal good?
7 The data below refer to the quantity demanded of good A and the price of A as a result of the
changes to the price of good B and good C:
QA (kg) PA (pence) P8 (pence) Pc (pence)
3 52 32 64
1.3
82 26 71
Are goods A and B substitutes or complements? What about goods A and C?
8 The data below refer to the market for cheese:
Quantity
Price
130 10
110 20
80 35
70 40
58 46
50 50
Plot the demand for cheese. For which prices is the demand for cheese elastic? For which prices is
the demand for cheese inelastic?
9 The market demand for a given good is Q D = 26 - 4P, while the market supply is Q 5 = 2P - 4. Find
the equilibrium price and quantity in the market. Now assume that the government introduces a
specific tax t = 3 on the suppliers. Find the new equilibrium price and the new equilibrium quantity.
Compare the pre-tax equilibrium with the after-tax equilibrium. What are the main differences?
10 Consider the following demand function: Q D = 25/P2• Show that the point elasticity of demand for
that function is always equal to -2.
11 (a) If the government wants to maximize revenue from cigarette tax, should it simply set a very
high tax rate on cigarettes? (b) If the government achieves its objective, what is the elasticity of
demand for cigarettes at the price corresponding to this tax rate? You may assume that cigarettes
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