Answer to Question #305196 in Microeconomics for mamalee

Question

Problem three: E-levy and elasticity of demand for electronic transaction

services

Consider the following facts about mobile money transactions. Currently, MTN and

AirtelTigo charge 1% on mobile money transactions up to a total charge of GHS 10

per transaction while Vodafone charges 0%. The E-levy which is currently being

discussed is intending to impose an additional 1.5% charge on most electronic

transactions.

a) In ordinary language, explain what it means to say the demand for mobile money

transactions is price elastic.

b) A deputy minister of finance has suggested that the introduction of the E-levy will

reduce mobile money transactions by 24%.1 Based on this and information in the

preamble to this question, is the demand for mobile price elastic or price inelastic? Does

your answer depend on which mobile network one is using?

Answer 1

a)

To say that mobile money transactions are price elastic means that the quantity demanded of this particular service is highly influenced by changes in price. The change in quantity demanded due to a change in price is very large.

b)

The demand for mobile price elastic as explained below;

 Imposing an additional 1.5% charge on most electronic transactions will lead to an increase in the price level hence leading to a bigger percentage fall in demand of both MTN and AirtelTigo and Vodafone mobile money transactions. The change in quantity demanded due to changes in price following the 1.5% increase in tax is large hence the demand is elastic.