Evaluation Of A Coffee Shop

question 1
Review Slides 10-12 in your Attend section. Suppose a local coffee shop knows that its elasticity of demand is 0.2. Would you recommend that the coffee shop increases its price by 20%? Why or why not?
Since the demand is less than zero, this is fairly inelastic demand. This means that quantity demanded won 't be affected much by changes in price. knowing this to be the case, I would suggest increasing price because while there will be some decrease in quantity demanded, it will be more than offset by the larger profits earned by the quantity demanded remaining.

question 2
Review Slides 10-12 in your Attend section. Suppose a cigarette manufacturer knows that its elasticity of demand is 1.3. Would you recommend that they raise the price by 20%? Why or why not?
In this situation, since the elasticity is greater than 1, I know that the demand for this product is pretty elastic. That tells me that percent changes in price will be smaller than percentage changes in quantity demanded. Another way to think of this is that changes in price will cause larger changes in quantity demanded. Here the change would be a decrease in quantity demanded due to the increase in price as price and quantity demanded generally have an inverse relationship.

question 3
Would the government be better off taxing gasoline or Nike tennis shoes? Use the concept of elasticity (or inelasticity) of demand to defend your choice.
This is really one of those questions where you can take whatever stance you want and as long as you defend it, you will be correct. My personal opinion is that would be better off taxing gasoline, at least in the beginning, as more people consume gasoline and at least a base amount of fuel sees a...

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...the free rider problem because people cannot easily be excluded from consuming the products and the detriments of additional people enjoying the consumption of these products are not readily observed. Another example of the free rider problem exists in the commons area example. In early villages, there was often an open area called a commons or common area. It was owned by all but also owned by none. It was a public good--non-excludable and at least in the beginning non-rival. Over time, there is a race to the bottom as people begin to graze their animals in the common area. Eventually, all the grass is gone from overuse by people who did and did not care for this common area. Had ownership been applied and this area took on characteristics of a private good, it would not get overused in the same fashion and the free rider problem would be lessened if not eliminated.