Author Question: What factors determine the magnitude of the price elasticity of demand? What will be an ideal ... (Read 33 times)

nelaaney · **on:** Jun 29, 2018

What factors determine the magnitude of the price elasticity of demand?

What will be an ideal response?

Question 2

Russia and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel for natural gas. The two strategies these countries face are to comply with the cartel agreement or to cheat on the cartel agreement.

If both countries comply, the economic profit for each will be 140 million. If one country cheats, that country earns 200 million in economic profit and the other country will have an economic loss of 10 million. If all countries cheat, they break even. What is the outcome of this game if it is only played once? A) Each country will comply with the cartel agreement.
B) Two countries will comply and one will cheat, but we cannot predict which one will cheat.
C) One country will comply and two will cheat, but we cannot predict which ones will cheat.
D) None of the countries will comply with the cartel agreement.

fffftttt · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

There factors determine the magnitude of the elasticity of demand: the closeness of substitutes, the time elapsed since a price change, and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. For instance, luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; and, narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods. The more time that has elapsed since a price change, the more substitutes consumers can find, so the elasticity of demand is larger the more time passes. Finally, the larger the fraction of consumers' income spent on a good, the larger is its elasticity of demand.

Answer to Question 2

D