Module 3 Problem Sets: Principles Of Economics Name Date Que

Module 3 Problem Setsprinciples Of Economicsnamedatequestion 1quest

Draw a perfectly inelastic supply curve.

If elasticity of demand is 0.5 and price is lowered from $20 to $19, by what percentage will quantity demanded rise?

(a) Illustrate a tax increase. (b) State what happens to equilibrium price and quantity.

If the price of eye surgery falls by 50-percent and the quantity of contact lenses demanded falls by 25-percent, find the cross-price elasticity of demand for these two goods.

A perfect competitor would never charge more than market price because ________________; the perfect competitor would never charge less than market price because ______________________.

How much is the firm's most efficient output?

At an output of 9, MC = 20 and AVC = $25. At an output of 10, MC = $32 and AVC = $26. What is the lowest price the firm will accept in the short-run?

There are basically only two justifications for monopolies:

The main economic criticism of monopolies and big business in general is that they are ________________________________.

Price discrimination occurs when a seller charges _________________________ for the same good or service.

The monopolistic competitor's demand curve slopes ________________________________________.

U.S. Steel and a few cigarette companies were all engaged in _________________________ to attain their economic ends.

The oligopolist ________________________ at the minimum point of his or her ATC curve.

The most important cartel in the world today is __________________________________________.

Paper For Above instruction

Principles of Economics: Analyzing Supply Structures, Demand Elasticity, Tax Impact, and Market Dynamics

Understanding the fundamental concepts of supply and demand elasticity, market competition, and monopolistic behavior is key to grasping the complexities of economic systems. This paper explores several critical areas, including the nature of supply curves, demand responses to price changes, impacts of taxation, cross-price elasticity, price competition, and monopoly justifications, providing a comprehensive overview of market mechanisms.

Perfectly Inelastic Supply and Demand Elasticity

A perfectly inelastic supply curve is represented as a vertical line on a graph, indicating that the quantity supplied remains constant regardless of price fluctuations. This situation typically occurs in markets where supply cannot be adjusted easily, such as in the case of fixed resources like land or perishable commodities (Mankiw, 2014). Conversely, demand elasticity measures how much quantity demanded responds to price changes; an elasticity of 0.5 signals inelastic demand, meaning a 50% change in price results in a 25% change in quantity demanded (Nicholson & Snyder, 2017). When demand is inelastic, price reductions lead to proportionally smaller increases in quantity demanded.

Tax Increase and Its Effect on Market Equilibrium

Implementing a tax increase generally shifts the supply curve upward or to the left, resulting in higher equilibrium prices and lower quantities exchanged (Pindyck & Rubinfeld, 2013). The diagram illustrating this change would show the original supply curve moving to a new position, with the intersection point with demand indicating the new equilibrium. Consumers face higher prices, and producers may receive less revenue depending on the tax’s incidence, which varies between buyers and sellers (Varian, 2014).

Cross-Price Elasticity of Demand Between Complementary Goods

The cross-price elasticity of demand quantifies the responsiveness of the quantity demanded for one good relative to the price change of another. Given a 50% reduction in the price of eye surgery and a 25% decrease in contact lens demand, the cross-price elasticity is calculated as (-% change in quantity demanded of contact lenses) / (-% change in price of eye surgery), which yields a negative value, indicating complementary goods (Krugman & Wells, 2010). Specifically, this elasticity is -0.5, reflecting that as the cost of eye surgery decreases, demand for contact lenses also diminishes, highlighting their substitution relationship.

Market Competition and Pricing Strategies

A perfect competitor charges market price because they are price takers; any deviation above market price results in losing all customers, while charging less would reduce their revenue without gaining market share (Frank, 2016). They never set prices below market because they would incur losses, as their costs are covered only at the equilibrium market price. In essence, perfect competition promotes price efficiency but limits individual firms’ pricing power.

Production Efficiency and Cost Minimization

The firm's most efficient output occurs where marginal cost (MC) equals marginal revenue (MR). In a competitive market, this is also where MC intersects demand, often aligning with the minimum point on the average total cost (ATC) curve (Samuelson & Nordhaus, 2010). Students must analyze cost curves to determine this optimal level, ensuring maximum profit while minimizing costs.

Short-Run Acceptable Price

At an output of 9, since MC ($20) is less than AVC ($25), the firm cannot cover its average variable costs and should shut down in the short run. However, at an output of 10, where MC is $32 and AVC is $26, the firm can operate as it covers variable costs and contributes to fixed costs, with the lowest acceptable price approximated by the MC at the relevant output level ($32). This ensures covering variable costs and minimizing losses.

Justifications and Criticisms of Monopoly and Market Power

Monopolies are justified primarily on the grounds of economies of scale and natural monopoly features, where a single provider reduces costs and improves efficiency (Tirole, 1988). The main critique, however, centers on market power leading to allocative inefficiency—monopolists restrict output to raise prices, thus reducing consumer surplus and overall welfare (Stiglitz, 2012).

Price Discrimination and Demand Curves

Price discrimination occurs when a firm charges different prices for the same good or service based on segment willingness or ability to pay, maximizing profit by capturing consumer surplus (Varian, 2014). Monopolistic competitors face downward-sloping demand curves that are more elastic than those of pure monopolies, reflecting the presence of close substitutes and product differentiation (Perloff, 2017).

Market Power, Cartels, and Oligopoly Behavior

U.S. Steel and notable cigarette companies engaged in cartel behaviors to coordinate prices and output levels, effectively restricting competition (Conant, 2020). Oligopolists often produce at the minimum point of their ATC curve to achieve productive efficiency, but they tend to collude or compete strategically, influencing market prices and output (Tirole, 1988). Today, the most influential cartel is OPEC, controlling significant oil exports worldwide and affecting global prices (Kaufmann & Wei, 2020).

References

• Conant, J. (2020). Cartel Formation and Market Power. Journal of Economic Perspectives, 34(3), 123-147.
• Frank, R. H. (2016). Microeconomics and Behavior. McGraw-Hill Education.
• Kaufmann, R. K., & Wei, Y. (2020). OPEC and oil prices: A review. Energy Policy, 138, 111297.
• Krugman, P. R., & Wells, R. (2010). Microeconomics. Worth Publishers.
• Mankiw, N. G. (2014). Principles of Economics (7th ed.). Cengage Learning.
• Nicholson, W., & Snyder, C. (2017). Microeconomic Theory: Basic Principles and Extension. Cengage Learning.
• Perloff, J. M. (2017). Microeconomics. Pearson.
• Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics (8th ed.). Pearson.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. McGraw-Hill Education.
• Stiglitz, J. E. (2012). The Price of Inequality. W.W. Norton & Company.
• Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company.