Price Elasticity of Demand (this question has 2 parts):

Part A: Elasticity Calculation

The Cozy Chair Company believes it can sell 200 chairs at $200 per chair or 300 chairs at $150 per chair. Using the midpoint formula, what do they think is the price elasticity of demand? Is the demand for Cozy Chairs elastic or inelastic?Does this make sense?Explain. (use determinants of price elasticity of demand.)

Part B: Elasticity and Total Revenue Test

The city of Chicago is losing millions of dollars on its buses and subways. The mayor proposes to increase the fare by 20% to raise revenue and has asked for your advice. You know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75. What do you think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.

Excise Tax Example (this question has 2 parts):

Part A:

Consider the market for butter, shown in the figure below.

a.What is the initial market equilibrium?

b.The government imposes an excise tax of $0.30 per pound of butter. What is the price paid by consumers post-tax? What is the price received by producers post-tax? What is the quantity of butter transacted? How is the incidence of the tax allocated between consumers and producers? Show this on the figure.

c.What is the deadweight loss of the excise tax? What is the tax revenue collected?