|Question||Use the facts in Exercise 1.3:
a. Hong and Wolak estimate that the elasticity of demand for postal services is -1.6. Assume that there is a constant elasticity of demand function, Q = Xp-1.6, where X is a constant. In 2006, the price of a first-class stamp went from 37¢ to 39¢. Given the information in the problem about the effect of the price increase on revenue, calculate X.
b. Calculate the size of the triangle corresponding to the lost consumer surplus (area B in Exercise 1.1). Note: You will get a slightly larger total surplus loss than the amount estimated by Hong and Wolak because they estimated a slightly different demand function.