Discuss both the price elasticity of demand and the cross-price elasticity of demand conditions facing a firm in a monopolistically competitive industry. Include in your essay the role of advertising and the creation of brand loyalty.
What will be an ideal response?
Firms in monopolistic competition advertise to differentiate their products and to create brand loyalty. Advertising shifts the demand curve to the right and also makes the demand curve less elastic. Under these conditions, the firm can raise prices and not expect to lose substantial numbers of customers when demand is more inelastic. Brand loyalty also means that consumers do not consider the other products in the market to be good substitutes. This means that cross-price elasticity will be low. Cross-price elasticity measures the change in quantity demanded for one good when the price of another good changes. By this measure, substitute goods will have a positive number that can be high or low. A low number indicates that consumers do not consider the other products to be good substitutes.
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When the government decides to impose a tax on sellers of a good or service, sellers try to pass the tax on to consumers by raising the price of the good being sold
Assume the government decides to place a $1 tax on each unit of a good sold, e.g., tires. Using the simple model of supply and demand, illustrate what would happen to the price and quantity of tires sold. Would the amount of tax paid by the consumer (as opposed to the producer) be greater when demand is elastic or inelastic? Why?
In practice, money supply and short-term interest rates are determined by the
a. Treasury and Commerce departments. b. Federal Open Market Committee. c. Board of Governors. d. House and Senate.
American Airlines makes numerous nonstop flights from Chicago's O'Hare Airport to the airport at Dallas-Fort Worth. The distance between those two cities is 1,000 miles. The only variable cost, fuel, costs $.06 for each passenger-mile it flies. Bob, on his way to an emergency business meeting, buys a ticket in coach class for $1,300 at the very last minute. The marginal cost of flying Bob from Chicago to Dallas-Fort Worth is:
A. $60. B. $160. C. $600. D. $1,300.
At full employment the unemployment rate equals the:
A. cyclical unemployment rate. B. structural unemployment rate. C. structural unemployment rate plus the cyclical unemployment rate. D. structural unemployment rate plus the frictional unemployment rate.