Reference no: EM132434293

BUECO5903 - Business Economics - Federation University

Assignment Part A- Microeconomics

Question 1

The Stop Decay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the last year. Recently, its closest competitor Decay Fighter reduced the price of its electric toothbrush from $35 to $30. As a result, Stop Decay's sales declined by 1,500 units per month.

(i) What is the cross price elasticity of demand between Stop Decay's toothbrush and Decay Fighter's tooth brush? Use the averaging formula. What does this indicate about the relationship between the two products?

(ii) If Stop Decay knows that the price elasticity of demand for its toothbrush is -1.5, what price would Stop Decay have to charge to sell the same number of units as it did before the Decay Fighter price cut? Assume that Decay Fighter holds its price of its toothbrush constant at $30 Use the averaging formula.

(iii) What is Stop Decay's average monthly total revenue from the sale of its electric toothbrushes before and after the price change determined in part (ii)?

(iv) Is the result in part (iii) necessarily desirable? What other factors would have to be taken into consideration?

Question 2

(a) Explain the differences between accounting profit, economic profit and normal profit.

(b) Suppose that due to changing tastes there is a sudden increase in demand for emu meat.
(i) Assuming the costs of emu meat production remain unchanged, what would you expect to happen to profits in the emu meat industry?
(ii) Assuming that there are low barriers to entry into the emu meat industry, explain why resources would move into this industry?
(iii) In the long run, what would you expect to happen to profits in this industry?
(iv) Will normal profits occur in this industry in the long run? If so, explain why?

Question 3

(a) Critically analyse and explain the following statement. "Goods and services are scarce because resources are scarce".

(b) During a five year period, the ticket sales of a city's professional football team have increased by 30 percent at the same time that average ticket prices have risen by 50 percent. Do these changes imply an upward sloping demand curve? Explain.

Question 4

Explain and illustrate graphically the effect of:
(i) An increase in income on the demand of an inferior good.
(ii) A drop in the price of product L, on the demand for a substitute product M.
(iii) A decline in income upon the demand of a normal good.
(iv) An increase in the price of product J upon the demand for complementary good K.

Question 5

Consider a hypothetical market for gold. On a diagram show a market demand curve D1 and a market supply curve S1 . Show on your diagram the market equilibrium price Pm and the quantity of gold produced Qm

Unfortunately gold mining pollutes the environment. The costs associated with pollution is borne by the whole community.

(i) With reference to the diagram you have drawn, does the market supply curve S1 incorporate all the costs of production of mining gold? Explain.

(II) Now suppose that the government wishes to internalise the pollution costs associated with gold mining by imposing a constant per-ounce tax on all firms in the industry. Show the impact of such a tax on your diagram. What will happen to the equilibrium price and quantity?

(iii) What is the incidence of this tax on suppliers and buyers and on other parties who do buy or sell gold? Use your diagram to illustrate your answer.

Question 6

Suppose the lawn mowing industry approximates a perfectly competitive industry. Suppose also that a single firm buys all of the assets of the lawn mowing firms and establishes a monopoly.. Contrast these two market structures with respect to price, output and allocation of resources. Draw a graph of the market demand and market supply for lawn mowing services before and after the takeover.

Would expect the monopoly to survive?

Question 7
(a) In practice, can firms in monopolistic competition really set their own prices without reference to the pricing decisions of their competitors? Explain.

(b) Why do firms in an oligopolistic industry have an incentive to collude? What are the factors that will influence the success or failure of their collusive efforts?