The Cross Elasticity of Demand and Indifference Curve Assignment

The Cross Elasticity of Demand and Indifference Curve - Assignment Example Indifference curve depicts equal levels of utility (satisfaction) for a consumer faced with various combinations of goods. There is no preference for one combination versus another as they render the same amount of satisfaction for the consumer. Consumer theory uses indifference curves and budget constraints to produce consumer demand curves. The curves are convex to the origin as a result of diminishing marginal utility. Ans: When the price elasticity of demand is less than one, the demand is inelastic. When the demand is inelastic, a given change in price causes a smaller proportionate change in the quantity demanded. Inelastic demand is for things which do not have a close substitute. When a tax is imposed on the product, the consumer bears the burden of the tax. The more inelastic the demand, the greater financial burden of a tax is placed on the consumer. When the demand is perfectly inelastic, the entire burden of a given tax will be borne by the consumer. Ans: In order to maximize profit, a firm would always try to sell more and more pollution permits and avoid buying permits for own, if possible. At the same time, there will be an effort to improve the efficiency of production to reduce pollution by less waste generation and yet keeping production cost low. Thus, the total cost of pollution abatement would be influenced by the degree of a transaction of pollution permits. For example, if a fir m earns high revenue from trading permits, it would not mind spending a part of the profit in reducing waste generation or carrying out better pollution abatement. Since eventually, it is the environmental groups who would be buying more and number of permits from most of the firms, the firms would be forced to generate less and less waste and the overall cost of pollution abatement will go down till an optimal level of pollution abatement is reached.