Chapter 5, Problem 2.5P

For each of the following scenarios, decide whether you agree or disagree and explain your answer.

1. a. If the elasticity of demand for cocaine is -0.20 and the Drug Enforcement Administration succeeds in reducing supply substantially, causing the street price of the drug to rise by 50 percent, buyers will spend less on cocaine.
2. b. Every year Christmas tree vendors bring tens of thousands of trees from the forests of New England to New York City and Boston. During the last 2 years, the market has been competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was -1.3, vendors would lose revenues altogether as a result of the price decline.
3. c. If the demand for a good has unitary elasticity, or elasticity is -1, it is always true that an increase in its price will lead to more revenues for sellers taken as a whole.