ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A tariff will keep all the Japanese video-recorders out of Germany.
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German manufacturers cannot compete in the video-recorder market.
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Japanese manufacturers’ profits will decrease if the price is reduced.
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Japanese manufacturers’ revenue from sales will increase if the price is reduce
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Detailed explanation-1: -The price elasticity of demand for Japanese video-recorders on sale in Germany is price-elastic. Which statement will therefore be true? A tariff will keep all the Japanese video-recorders out of Germany.
Detailed explanation-2: -If demand is elastic, then a price increase reduces the total revenue. When the price increases, then the demand falls by a considerable percentage. Then, total revenue starts moving in contradictory directions. Therefore, total income declines when the price of any commodity rises.
Detailed explanation-3: -When demand is price inelastic, a given percentage change in price results in a smaller percentage change in quantity demanded. That implies that total revenue will move in the direction of the price change: an increase in price will increase total revenue, and a reduction in price will reduce it.
Detailed explanation-4: -The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. If the quotient is greater than or equal to one, the demand is considered to be elastic. If the value is less than one, demand is considered inelastic.
Detailed explanation-5: -a) If demand is price inelastic, then increasing price will decrease revenue.