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Chapter 5: Problem 13

In February, \(2003,\) Germany's patent office proposed a solution to reimburse copyright holders for illegal digital file sharing: charging personal computer manufacturers a fee of \(\$ 13\) per computer that would go into a special fund to reimburse the copyright holders. Two computer makers-Fujitsu-Siemens and HewlettPackard- -claimed that imposing the fee would do great injury to them because they would be unable to pass any of the fee onto consumers. Under what assumptions about the demand curve would the computermakers' claim be true? Is this assumption realistic?

Short Answer

Expert verified
The computer makers' claim would be true under the assumption that the demand for computers is perfectly elastic, meaning any small increase in price leads to a drastic reduction in demand. However, this assumption is not realistic as consumer demand for computers is likely to be elastic but not perfectly so. It is unlikely that a $13 increase in price would cause computer sales to drop to zero.

Step by step solution

01

Understanding the Demand Curve

A demand curve is a graph illustrating how changes in price affect the quantity of the product a consumer is willing and able to purchase. If the demand for the product (in this case, computers) is perfectly elastic, any price increase would drastically reduce the quantity demanded to zero. A perfectly elastic demand curve is horizontal.
02

Identifying the Assumption

The computer makers' claim would be true if the demand for their products is perfectly elastic. This assumption means that consumers would buy significantly fewer computers or stop buying altogether if manufacturers increase the price by only a small amount, such as the $13 fee.
03

Evaluating the Realism of the Assumption

The assumption of perfectly elastic demand is generally unrealistic for most goods and services, including computers. It is unlikely that a small increase in price (like the $13 fee proposed) would cause consumers to stop purchasing computers completely. The demand for computers is likely to be elastic, but not perfectly so. This means that while sales might decline if prices increase, they are unlikely to drop to zero.

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Most popular questions from this chapter

Some studies suggest that "tooth extraction" is an inferior good. Which measure of elasticity (price elasticity of demand, price-elasticity of supply, income elasticity, or cross-price elasticity) would provide evidence to support this claim? What would we look for in this elasticity measure to determine if tooth extraction were inferior?

Three Guys Named Al, a moving company, is contemplating a price hike. Currently, they charge \(\$ 30\) per hour, but Al thinks they could get \(\$ 40 .\) Al disagrees, saying it will hurt the business. Al, the brains of the outfit, has calculated the price elasticity of demand for their moving services in the range from \(\$ 30\) to \(\$ 40\) and found it to be 0.5 a. Should they do as Al suggests and raise the price? Why or why not? b. Currently, Three Guys is the only moving company in town. Al reads in the paper that several new movers are planning to set up shop there within the next year. Twelve months from now, is the demand for Three Guys' services likely to be more elastic, less elastic, or the same? Why?

Sketch a demand curve that is unit elastic for a price change between \(\$ 9\) and \(\$ 11 .\) Assume that the quantity demanded is 110 when price is \(\$ 9 .\) You'll have to determine the quantity demanded when price is \(\$ 11\)
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