(a) Suppose that the price elasticity of demand for Mercedes Benz is -4.7 and that, as...

 

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(a) Suppose that the price elasticity of demand for Mercedes Benz is -4.7 and that, as a result of an increase on government sales tax, the new equilibrium price rises by 10%. Explain what will happen to total revenue in the Mercedes Benz car industry: will it rise or fall? Also, with the use of an appropriate diagram, explain who will bear most of the burden between consumers and producers of the sales tax? (7 marks) (b) Assuming Pepsi and Coke to be very close substitutes to each other, all other things remaining same, will the cross price elasticity of demand between them be negative or positive? Explain your answer. (3 marks) (a) Suppose that the price elasticity of demand for Mercedes Benz is -4.7 and that, as a result of an increase on government sales tax, the new equilibrium price rises by 10%. Explain what will happen to total revenue in the Mercedes Benz car industry: will it rise or fall? Also, with the use of an appropriate diagram, explain who will bear most of the burden between consumers and producers of the sales tax? (7 marks) (b) Assuming Pepsi and Coke to be very close substitutes to each other, all other things remaining same, will the cross price elasticity of demand between them be negative or positive? Explain your answer. (3 marks)

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a When the price elasticity of demand is 47 it indicates that the demand for Mercedes Benz cars is relatively elastic In other words a 1 increase in p... View the full answer