1)State true or false and justify your answer:

Governments want to implement a price hike policy to significantly reduce the consumption of cigarettes. This policy will be effective if demand is inelastic.

2)What does it mean for products to have different price elasticities?

3)At the end of a process of entry and exit, for the marginal firm:

a. Price is equal to the average total cost,

b. Total revenue is equal to the total cost,

c. Economic profit is zero,

d. All of the above are correct.

1)Ans: False

Workings:

When demand for a good is inelastic, a change in price does not have significant impact on the demand for that good. And when demand for a good is inelastic, a change in price does not have significant impact on the demand for that good. Since the demand for cigarette is inelastic, the policy of price hike will not be effective in reducing the consumption of cigarettes.

Thus, the statement is false.

2)please see the attached file for the complete solution.

3)The correct answer is d. All of the above are correct.

• The economic profit is $0 because the total revenue is equal to the total costs incurred, which also implies that the average revenue (i.e. the selling price) is equal to the average total cost.