Part 1
2.Taxes on the sale of alcohol and tobacco are often referred to as "sin taxes." Officials of state governments that impose sin taxes argue that the taxes discourage the use of alcohol and tobacco. What is another argument for imposing the taxes. Make sure you refer to elasticity and revenue.
3. Holding everything else constant, if a firm’s revenue (price x quantity sold) from sales of widgets were to increase by 8 percent in response to an increase in the price of widgets by 3.5 percent, would this mean that the elasticity of demand for widgets is price-elastic or price-inelastic? Briefly explain your answer.
4. Holding everything else constant, assume the quantity demanded for Big Macs decreased by 10 percent after the price of Big Macs was increased by 6 percent. What would be price elasticity of demand for Big Macs? Explain how you derived your answer.
5.Based on your answer to the previous question, would the revenue McDonald’s restaurants received from sales of Big Macs increase or decrease following the increase in the price of Big Macs? Briefly explain your answer
6. Mondelez Chief Executive Dirk Van de Put stated that: "A few years ago, Mondelez went too far with price hikes in emerging markets … ‘We will have to step very carefully and make sure we continue to see volume growth for our brands,’ he said." Assume that going "too far with price hikes" means that revenue from sales of products declined in emerging markets when Mondelez raised their prices. What would this imply regarding the price elasticity of demand for these products?
7. Alamo has reduced the price of renting a car in Britain by 10 percent.
a) If the intent is to increase revenue, what needs to happen to the quantity demanded ? Would it have to rise by an amount, less than, equal to, or greater 10 percent. (Hint: since the price if falling by 10, it will drag down revenue, so what has to happen to the quantity in order to drag revenue up and make it a positive number)
8. Assume that the Ajax Chip Company decreases the price of its computer chips and that the current price elasticity of demand for Ajax chips is equal to -1.5. Will the revenue the firm receives from sales of its computer chips increase or decrease? Briefly explain your answer.