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What Are the Major Determinants of Price Elasticity of Demand

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3. What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; (f) Microsoft Windows operating system. ---Substitutability, proportion of income; luxury versus necessity, and time. Elastic: (a), (c), (e). Inelastic: (b), (d), and (f).

5. Calculate total-revenue data from the demand schedule in question 2. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue. --- Total revenue data, top to bottom: $5; $8; $9; $8; $5. When demand is elastic, price and total revenue move in the opposite direction. When demand is inelastic, price and total revenue move in the same direction.

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4. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain. Public goods are nonrival (one person’s consumption does not prevent consumption by another) and nonexcludable (once the goods are produced nobody—including free riders—can be excluded from the goods’ benefits). If goods are nonrival, there is less incentive for private firms to produce them – those purchasing the good could simply allow others the use without compensation. Similarly, if goods are nonexcludable, private firms are unlikely to produce them as the potential for profit is low. The free-rider problem occurs when people benefit from the public good without contributing to the cost (tax revenue proportionate to the benefit received). The…...

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