Question

1) % Change in Price | % Change in Elasticity uantit %5 Demand for hot chocolate at Alta Ski Resort Demand for food at 1-20% Jazz Games Demand for milk 10% 0.5 10% 10% -10 a) Given the answers above, would you raise hot chocolate prices at Alta? (12 points) Elasticity -0.5< 1 inelastic Increasing price will increase revenue Hot chocolate price should be increase 2) Suppose that the government spends millions of dollars to destroy coca fields in Columbia. Now, suppose the demand for cocaine has an elasticity of.17. What is the net intended effect of the government with these two policies? What is the actual effect in terms of prices and quantities because of an inelastic demand? (10 points)

Answer 1

B = Since the government has burnt the fields of coca, the supply of the cocaine will be adversely affected.

But since the price elasticity of demand is 0.17 which means that the demand is inelastic hence there will be very less or no effect on the quantity demanded due to the change in the price. Hence the government policy to burn the farms of coca to reduce the production of cocaine will not affect the demand for cocaine.

If the prices of the cocaine rise to a very high extent in a hope that the demand of the cocaine will fall, then their will be failure because the demand is inelastic and is unlikely to change as a result of any change in the price or the policies of the government.