Answer to Question #246634 in Microeconomics for Biba

Question

8. Elasticity problems:
c. Jack and Jill went up the hill to a gas station that does not display the prices. Jack says, “Give me $10 worth of gas.” Jill says, “Give me 10 gallons of gas.”
What are the price elasticities of demand for gasoline of Jack and of Jill? Explain.
d. Can you explain why farmers during a depression might approve of a government program requiring that pigs be killed and buried under the ground?
e. Look at the impact of the minimum wage shown in Figure 4 -12 . Draw in the rectangles of total income with and without the minimum wage. Which is
larger? Relate the impact of the minimum wage to the price elasticity of demand for unskilled workers.

Answer 1

c)

The answer to the question depends on the level of sensitivity. Jill needs ten gallons of gas at whatever price, even if the price is higher. Jack can acquire less or more gas depending on the price. Consumption of gas to Jack is more sensitive (elastic), and the demand for gas for Jill is more sensitive (inelastic).

d)

The policy would cause the supply curve of pork to shift to the left, increasing the market prices. As illustrated in this chapter, the demand for agricultural products is inelastic, leading to higher prices, which will cause higher incomes to the farmers. 

e)

It is clear from the graph that the rectangle area starting from the origin to E (blue color line) is bigger than the area of the rectangle that covers from the original point to M (light pink line).  

The difference between the sizes of the rectangles is because the demand for unskilled laborers is inelastic. Inelastic shows that change in wages causes employment change. Total income, the product of employment and wages, will increase.