Econ Essay Example

Economics 8

Subject: Economics

Question 1

  1. Market demand and market supply curves

Figure 1: demand and supply curve

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Equilibrium price = 2

Equilibrium quantity = 1200

  1. Price elasticity of demand and supply at equilibrium

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We shall consider the price of 1.5 and 2.5 since the mid-point of the two prices represent equilibrium level.

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  1. Consumer and producer surplus at equilibrium

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The area that has been shaded in red is consumer surplus while the yellow region is producer surplus.

  1. If a tax of $0.50 were imposed on buyers, the impact on price and quantity would be as shown in the table below. Price would increase while quantity demanded declines.

1923.077

1538.462

1153.846

769.2308

384.6154

0

It is clear in figure 1 above that a tax of $0.5 imposed on buyers has the impact of shifting the demand downwards as shown by the arrow.

Price sellers receive after tax: Use new demand curve and initial supply curve

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  1. Consumer and producer surplus after tax

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Figure 2: After tax

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In figure 2, government tax is shaded in blue colour, consumer surplus after tax is shaded in red colour, while producer surplus after tax is shaded in yellow colour. Deadweight loss is the unshaded triangle at the centre.

  1. Tax burden on buyers and sellers:

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Both the buyer and seller contribute the same amount towards the tax. No one has a larger share in the tax burden.

  1. Price floor of $2.50 imposed in the market for apples:

  1. Consumer surplus

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  1. Producer surplus

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  1. Deadweight loss

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Figure 3: Price floor of 2.5

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According to figure 3, the red triangle is consumer surplus, blue trapezium is producer surplus, and orange triangle is deadweight loss.

  1. Subsidy of $1 given to sellers will allow sellers to sell the same units but at a lower price as shown in the table below:

Price after Subsidy

0

0

Figure 4: Subsidy of $1 imposed on sellers

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  1. Consumer and producer surpluses after the subsidy

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Figure 5: Illustration of subsidy

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The red region is the gain in producer surplus while the blue region is the gain in consumer surplus. The yellow triangle represents loss in welfare or rather deadweight loss.

Question 2

  1. Total revenue, marginal revenue, marginal cost, and average cost for the monopolist are as shown in the table below.

Price ($ per unit)

Qty (unit)

0

0

0

0

0

  1. A plot of demand, marginal revenue, marginal cost and average cost curves

Figure 6: Monopolist

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  1. Profit maximising quantity and price

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In figure 6, monopolist profit is represented by the shaded region. The amount of profit is
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  1. The outcome is not efficient because the monopolist price greater than marginal cost.

  2. If the monopolist is now able to perfectly price discriminate, the quantity that will maximize profits is 1 unit at a price of $30. The outcome is not efficient because the monopolist price is greater than marginal cost.

  3. Marginal cost pricing rule requires that firms should set the price equal to marginal cost of production. The benefit of the rule is that the firm is operating efficiently since price is equal to marginal cost. Conversely, the rule is problematic since normal profits are not guaranteed. This is illustrated in figure below where MC cuts Demand curve.

Figure 7: Marginal cost pricing

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  1. Average cost pricing rule is a situation where price is set to equate average total cost. The benefit of average cost pricing rule is that a monopoly is guaranteed a normal profit. On the other hand, the rule is bad because marginal cost is below average total cost hence price is greater than marginal cost. This means that there is no efficiency.

Question 3

  1. Payoff matrix for the game

No change in price

Decrease in price

Increase in price

No change in Price

Decrease in Price

Increase in price

0

0

0

  1. Either firm has dominated strategy

  2. The game has Nash equilibrium. This is indicated by a firm that increases the price. Such firm will earn zero. In this case, no firm has the ability to increase unilaterally the price.

  3. The game has first mover’s advantage. A firm that makes the first move of decreasing the price when the other increases the price will earn more in the game.

  4. Nash equilibrium is not the best solution because an attempt to increase price by either party results in zero earnings for that party.