Which of the following explains why a firm would be interested in ...

[D2AR0N]

Which of the following explains why a firm would be interested in knowing the price elasticity of demand for a good it sells?
 
  A) The price elasticity of demand can be used to determine the impact of changes in income on quantity sold.
  B) Knowing the price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total profit.
  C) The price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total revenue.
  D) Knowing the price elasticity of demand allows the firm to determine how the cost of producing additional units of the good will change.

Question 2

What are transactions costs? Why do transactions costs create difficulties in finding a private solution to the problem of pollution?
 
  What will be an ideal response?

[wuly]

Answer to Question 1

C

Answer to Question 2

Transactions costs refer to the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. In the case of pollution, there are often both many polluters and many people suffering from the negative effects of pollution. The transactions costs in dealing with the reduction of pollution would include the time and other costs of negotiating and monitoring an agreement, drawing up a binding contract, and purchasing insurance. When many people are involved, the transactions costs can be higher than the net benefit from reducing the pollution and a private solution may not be feasible.