Module 3 Problem Sets Principles Of Economics Name Date Ques

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?

The perfect competitor operates at the __________________ point of his or her average total cost curve in the long-run.

A monopoly is a firm that has ____________________substitutes.

The five barriers to entering a monopolized industry are:

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

The problem set provided covers a broad spectrum of principles in economics, including supply and demand elasticity, taxation impacts, market structures, and business strategies. Each question encourages critical analysis of fundamental economic concepts, which are essential to understanding market behaviors and decision-making in real-world scenarios.

Question 1: Draw a perfectly inelastic supply curve

A perfectly inelastic supply curve is represented graphically as a vertical line. This indicates that the quantity supplied remains constant regardless of the price. This scenario often occurs in markets where the supply is fixed, such as natural resources or unique goods with limited availability.

Question 2: Price Change and Demand Elasticity

Given the elasticity of demand as 0.5, a price decrease from $20 to $19 (a 5% decrease), would result in a 2.5% increase in quantity demanded. This calculation uses the formula for price elasticity: % change in quantity demanded = elasticity × % change in price.

Question 3: Tax Increase Effects

A tax increase shifts the supply curve upward, leading to a higher equilibrium price and lower equilibrium quantity. Consumers bear part of the tax burden through higher prices, while producers may experience reduced sales volume.

Question 4: Cross-Price Elasticity

Cross-price elasticity measures the responsiveness of demand for one good when the price of another changes. If a 50% decrease in eye surgery price causes the demand for contact lenses to fall by 25%, the cross-price elasticity is -0.5, indicating these goods are complements.

Question 5: Market Price and Competition

A perfect competitor charges no more than the market price to remain competitive because charging more would lose customers, and charging less would imply selling at a loss, which is unsustainable in the long term.

Question 6: Most Efficient Output

The most efficient output level is where marginal cost equals marginal revenue, typically where the firm maximizes profit subject to market constraints. In a competitive market, this aligns with the minimum point of the average total cost curve.

Question 7: Short-Run Acceptable Price

At outputs of 9 and 10, the firm’s minimum acceptable price is at least equal to the higher marginal cost, which is $32 at an output of 10. Thus, the firm will accept a price of no less than $32 in the short run.

Question 8: Perfect Competitor Long-Run Operating Point

In the long run, a perfect competitor operates at the quantity where price equals the minimum average total cost, ensuring zero economic profit and productive efficiency.

Question 9: Monopoly Substitutes

A monopoly has few or no close substitutes, giving it market power and the ability to set prices without losing customers to competitors.

Question 10: Barriers to Entry

• Legal barriers such as patents and licenses
• Economies of scale and high startup costs
• Control over essential resources
• Brand loyalty and advertising
• Strategic behaviors to prevent entry

Question 11: Justifications for Monopolies

Two primary reasons are: 1) to incentivize innovation through exclusive rights, and 2) market failures where competition may lead to inefficiency.

Question 12: Economic Criticism of Monopolies

Monopolies are criticized for reducing consumer choice, decreasing output, and increasing prices, leading to allocative inefficiency and potential deadweight loss.

Question 13: Price Discrimination

Price discrimination occurs when a seller charges different prices for the same good or service to different consumers based on willingness to pay.

Question 14: Demand Curve Slope

In monopolistic competition, the demand curve slopes downward, indicating that falling prices increase the quantity demanded.

Question 15: Oligopolist Strategies

Companies like U.S. Steel and cigarette firms often engage in cartel behaviors to coordinate prices and output, minimizing competition and maximizing joint profits.

Question 16: Oligopolist Output Point

The oligopolist typically produces where marginal cost equals marginal revenue, which can often be near the minimum point of the ATC curve due to strategic considerations.

Question 17: Major Cartel

The most significant cartel today is OPEC (Organization of Petroleum Exporting Countries), which controls a major portion of the world's oil supply and influences global prices.

Additional Analysis

The economic analysis of business decisions and market structures reveals the importance of understanding elasticity, efficiency, barriers to entry, and strategic behavior. For example, understanding the inelastic supply helps policymakers predict market responses to shocks, while knowledge of market structures guides firms in strategic planning. Moreover, the role of cartels and monopolies underscores the importance of regulatory oversight to prevent market failures and promote consumer welfare.

Effective marketing strategies, as highlighted in the recent questions, are critical for companies competing in diverse industries. For instance, Wendy's and McDonald's differ significantly in their target markets and marketing approaches, influencing their future competitiveness. McDonald's focus on children through toys and advertising fosters brand loyalty, whereas Wendy's targeting of adults aims at a different consumer segment. The strategic positioning of each company depends on their ability to adapt to changing consumer preferences and regulatory environments.

Globally, the evolution of international accounting standards like those maintained by the IASB is vital for creating consistency in financial reporting. Projects such as the development of new revenue recognition or lease accounting standards aim to address complex issues, enhance comparability, and improve transparency across markets. The IASB's efforts contribute significantly to reducing discrepancies that could distort investment decisions and foster economic stability.

References

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• Organization of the Petroleum Exporting Countries (OPEC). (2023). About OPEC. Retrieved from https://www.opec.org
• International Accounting Standards Board (IASB). (2023). Current Projects. Retrieved from https://www.ifrs.org/projects
• Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy (13th ed.). Cengage Learning.
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