Brilliant Elasticity

Quantitative Finance Level 2

Brilliant Industries creates a consumer good called problems. Suppose that the demand for problems is relatively elastic, and the supply of problems is relatively inelastic. Which one of these scenarios will see the greatest relative increase in the quantity of problems at the equilibrium point? (Assume that each scenario will affect either the supply of or the demand for the product.)

The federal government imposes a tax on the production of problems The price of numbers, which are used to produce problems, decreases The price of solutions, which are complementary goods to problems, increases New online ads increase consumer interest in problems

Steven Yuan by Steven Yuan , 20, USA

This section requires Javascript.
You are seeing this because something didn't load right. We suggest you, (a) try refreshing the page, (b) enabling javascript if it is disabled on your browser and, finally, (c) loading the non-javascript version of this page . We're sorry about the hassle.

2 solutions

Steven Yuan
Sep 8, 2017

Let's examine each scenario:

  1. The price of numbers, which are used to produce problems, decreases : Because numbers are a factor of production, this will cause an increase in the supply, a rightward shift in the supply curve, and an increase in the quantity demanded.
  2. The federal government imposes a tax on the production of problems : A tax limits the resources available to produce the good. This will cause a decrease in the supply, a leftward shift in the supply curve, and a decrease in the quantity demanded.
  3. New online ads increase consumer interest in problems : This will cause an increase in the demand for problems, so the quantity demanded will increase.
  4. The price of solutions, which are complementary goods to problems, increases : If the price of a complementary good increases, then the demand for the original good will decrease, so the quantity demanded will decrease.

Only options 1 and 3 result in an increase in the quantity demanded. Now, this is where the elasticity of the supply and demand curves come in. For a constant increase in price, a shift along an elastic curve will produce a greater increase in the quantity demanded than a shift along an inelastic curve. Option 1 represents a shift along the demand curve, which is elastic; option 3 represents a shift along the supply curve, which is inelastic. Therefore, option 1 will result in the greatest relative increase in quantity demanded.

3 Helpful 1 Interesting 0 Brilliant 0 Confused

A decrease in production costs causes a vertical shift in the supply curve. An ad causes a multiplication of the demand curve. Without specific numbers, it is impossible to tell which will have a greater effect.

Gregory Lewis - 3 years, 9 months ago

Log in to reply

I'm asking about which one would produce a relatively greater effect. With the same price increase/decrease, a shift along the elastic demand curve will be greater than a shift along the inelastic supply curve, so increasing supply will have a more pronounced effect than increasing demand.

Steven Yuan - 3 years, 9 months ago

I guess it depends on why the supply is inelastic. If it's inelastic because of limited funds, then it is indeed a shift to the right and causes a larger change in quantity sold. If it is inelastic for ANY other reason, such as limited production capacity or a limited supply of numbers, then it is a vertical shift, NOT a horizontal shift. That has a similar effect to the ads, which also operates vertically. Both of those have a similar, small effect on quantity sold.

Gregory Lewis - 3 years, 9 months ago

Cases where it is reduced: 1) A tax would increase the cost of buying problems. An elastic demand would reduce the amount of products bought, thus reducing the point of equilibrium. 3) Since solutions are a complementary product, people would start to buy them in considerable amounts, thus reducing the point of equilibrium of problems. Cases where it is increased: 4) If the interest in problems increase, then the demand increases, resulting in a higer point of equilibrium, thought the offer would remain unchanged or slightly affected in a negative way (depends on the value of the ads and if they are taken into account). 2) Cheaper costs of producting result, in this case, in a slightly increase in the offer but also a disccount in the price which makes the demand take off, proudicing this way a new point of equilibrium with higer demand and offer. Answer: Number 2, since this is the only option that represents a considerable increase in both variables, offer and demand, which determine the point of equilibrium. As opossed as the other options.

0 Helpful 0 Interesting 0 Brilliant 0 Confused

0 pending reports

×

Problem Loading...

Note Loading...

Set Loading...