Homework Clinic
Social Science Clinic => Economics => Macroeconomics => Topic started by: olgamartinez04 on Nov 23, 2022
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Consider the market for newspaper delivery jobs in Hermittown. Currently, each delivery driver receives a rate of $2 per subscriber per month and has a fixed territory that initially has 7.25 subscribers. The price elasticity of demand for subscriptions is 3.25. Suppose the new city council passes a law that establishes a minimum rate of $4.25 per subscriber per month. As a result, the publisher increases the price of a subscription by 25 percent. This new law results in a ________ percent change in income for a typical newspaper delivery driver.
Please round your final answer to two decimal places.
◦ -60.16
◦ -163,349.04
◦ -38,511.54
◦ 5913.28
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-60.16
Before the law, a typical delivery driver earned an income of rate times subscriptions.
Income = Rate*Subscriptions = 2*7.25 = $14.5
After the law, the increase in the rate increases the price of a subscription by 25 percent. To see how this affects the quantity demanded of subscriptions, use the formula for the price elasticity of demand.
Price elasticity of demand= % change in quantity/% change in price
3.25 = % change in quantity/25
% change in quantity = 3.25*25 = 81.25%
Therefore, the new quantity of subscriptions = (1 - (% change in quantity/100))*Subscriptions = (1 - 81.25/100)*7.25 = 1.359375
Income after law = New Rate*New Subscriptions = 4.25*1.359375 = $5.77734375
To find the % change in income = 100*(Income after law - Income before law)/Income before law = 100*(5.77734375 - 14.5)/14.5 = -60.16.