Potential Ethical Concerns

1. Consider supply and demand. We have looked at several different aspects of this relationship. Answer the following questions:
   1. We have seen that both supply and demand can change at the same time. In particular, if both supply and demand increase, quantity will also increase at equilibrium. Show, however, that we cannot say for sure what will happen to price at the new equilibrium. Draw three graphs. In the first, show that supply and demand can increase and the result can be a price increase. In the second, show that the price might decrease instead. In the third, show that price could also just stay the same. (Hints: Two possible effects to help you show this are differing elasticities and differing sizes of the increases in supply and demand.)
   2. What does it mean if I tell you that the price elasticity of demand of apples is 3.2, while the price elasticity of demand of apple juice is 1.5? In your answer, be sure to explain what elasticity is and whether you consider these products to be elastic or inelastic. Finally, suggest reasons why these elasticities might make sense. Are there complements? Substitutes? Explain.

2. Consider supply and demand in the presence of taxation. Suppose you have two different products and you are considering a tax on one or the other of the products. Here are the details for each product:

Product ASupply Equation:  Demand Equation:  (Both are quantities in thousands.) The tax being considered is $1.50 per item.

Product BSupply Equation:  Demand Equation:  (Both are quantities in thousands.) The tax being considered is $1.75 per item.

 

Answer the following questions:

1. Which tax will actually raise more tax revenue?
2. Which tax will result in the greatest loss of net benefit (largest deadweight loss)?
3. Based purely on these considerations, which tax would you choose – product A or product B? Explain your decision.
4. What other considerations might affect your decision? (For example, are there potential ethical concerns to watch out for?)