Economics???

Question

1.How might you determine wether compact discs and cassettes are in competition with each other??

2. Opponents of increasing the tax on gasoline argue that the big oil companies just pass the tax along to the consumers. Do you agree or disagree?

tHanks for your help!

Answer 1

1. Cross price elasticity. if cassette volume increases when compact disk prices drop, then they are substitutes. If volume of cassettes decreases when disk prices drop, then they are complimentary

2. Oil is price inelastic in the short term. That means that consumers will absorb any price increase without decreasing the volume consumed. I would agree.

Answer 2

1. Cassettes and CD's satisfy same need (compact storage of music) - nobody would buy same album both on casestte and CD. You can also observe cassetes sales going down as CD sales increased.

2. Agree. Gasoline sales are "inelastic" - i.e. if price goes up, you will keep buying same amount of gas (or maybe decrease it just a bit, way less than the price has increased in % terms). So oil companies can increase the price w/o fear of loosing consumers.

Gas prices do not go through the roof b/c of competition between companies, plus unspoken agreement on how high the profit margin should be. Tax will increase everybody's cost, so they'll just add same old profit margin to new costs, passing the tax onto consumer.