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Chapter 6: Problem 7

Jacob Goldstein, a correspondent for National Public Radio, discussed the effect that a tax on sugared soft drinks would have on consumers: "How much would a tax drive down consumption? Economists call this issue 'price elasticity of demand'- how much demand goes down as price increases." Briefly explain whether you agree with Goldstein's definition of price elasticity of demand. Source: Jacob Goldstein, "Would a Soda Tax Be a Big Deal?" Planet Money, March 10,2010

Short Answer

Expert verified
Jacob Goldstein's definition of price elasticity of demand is broadly correct in terms of its foundational concept. However, it does not fully convey the subtleties of the concept, including the measure of degree of responsiveness of demand to price changes, and it doesn't consider inelastic cases where the demand may not decrease with an increase in price.

Step by step solution

01

Understand the Price Elasticity of Demand

Price elasticity of demand is a measure of the change in the quantity demanded of a product in response to a change in its price. It's calculated by using the formula: \[ Price Elasticity of Demand = \frac { \% Change in Quantity Demanded} { \% Change in Price} \].
02

Analyze Goldstein's definition

According to Jacob Goldstein, price elasticity of demand is 'how much demand goes down as price increases'. It's clear that Goldstein's interpretation is a simplified form of the canonical definition, focusing on the core concept that an increase in price typically leads to a decrease in demand, giving the basic idea of price elasticity.
03

Evaluate the Definition

Goldstein's definition captures the essence of price elasticity – the relationship between change in price and change in demand. However, it omits certain nuances like the measure of the degree of responsiveness, and not all products show decrease in demand with increase in price (inelastic demand). It's a matter of degree – some product's demand may decrease a lot, some very little.

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Most popular questions from this chapter

If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?

A study of the consumption of beverages in Mexico found that "overall, for soft drinks a \(10 \%\) price increase decreases the quantity consumed by \(10.6 \%\)." Given this information, calculate the price elasticity of demand for soda in Mexico. Is demand price elastic or price inelastic? Briefly explain. Source: M. A. Colchero, et al. "Price Elasticity of the Demand for Sugar Sweetened Beverages and Soft Drinks in Mexico," Economics and Human Biology," Vol. 19, December 2015, pp. \(129-137\).

If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue that orange juice sellers receive?

Consider firms selling three goods: Firm A sells a good with an income elasticity of demand less than zero; Firm B sells a good with an income elasticity of demand greater than zero but less than one; and Firm \(C\) sells a good with an income elasticity of demand greater than one. In a recession when incomes fall, which firm is likely to see its sales decline the most? Which firm is likely to see its sales increase the most? Briefly explain.

The publisher of a magazine gives her staff the following information: $$ \begin{array}{l|l} \hline \text { Current price } & \$ 2 \text { per issue } \\ \hline \text { Current sales } & 150,000 \text { copies per month } \\ \hline \text { Current total costs } & \$ 450,000 \text { per month } \\ \hline \end{array} $$ The publisher tells the staff, “Our costs are currently \(\$ 150,000\) more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to \(\$ 3\) per issue. This will result in our revenue being exactly equal to our cost." Do you agree with the publisher's analysis? Explain. (Hint: Remember that a firm's revenue is calculated by multiplying the price of the product by the quantity sold.)
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