Price and quantity demanded are inversely

Running head: MICROECONOMICS
Microeconomics
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Table of Contents
Answer to Question: 1.....................................................................................................................2
Answer to Question: 2.....................................................................................................................3
Answer to Question: 3.....................................................................................................................4
Answer to Question: 4.....................................................................................................................6
Reference List..................................................................................................................................8

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Quantity
Price
DB
DA
QA
A
QB
PA
PB
SA
Answer to Question: 1
Answer: a
Normal goods are those where a rise in income of the consumer leads to arise in demand
for the good. Considering that tickets of CFL game are normal goods, a rise in income of CFL
fans, would lead to a growing demand for CFL tickets such that it would shift the demand curve
towards right, from position DA to DB. Supply of the tickets is relatively inelastic because
quantity of the seats cannot be changed, although quantity of tickets sold could be changed for a
bit (Geroski, & Jacquemin, 2013).
Figure 1: Effect of change in demand
Source: (As created by the author)
The result is a rise in equilibrium price and quantity from level PA and QA to PB and QB
respectively, because of rising demand, as shown in Figure 1.

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Answer b
Substitute goods are those goods which have mostly same features and satisfies the same
level of consumer demand. One good can be used in place of other good when there is rise in
price of one good (Scitovsky, 2013). Price and quantity demanded are inversely related such that
rise in subscription price of TSN would lead to a fall in demand for TSN. As TSN and RDS are
sports channels, therefore demand for RDS channel would go up as consumers would substitute
TSN for RDS.
Answer to Question: 2
In order to explain the relationship between number of diamonds purchased and the
average income of the consumers, the average income would be the dependent variable and the
number of diamonds purchased would be the independent variable. This is because the income of
the people determines the number of diamonds purchased (Dupraz, 2016).

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Number of diamonds purchasedQ1 Q2
I1
I2
Average income
Figure 2: Relation between average income and number of diamonds sold
Source: As created by the author
Diamonds are treated as luxury goods, such that rise in income would lead to rise in
purchase of diamonds, showing a positive relation with each other (Knittel & Pindyck, 2016).
Increase in income from I1 to I2, would increase the number of diamonds purchased from Q1 to
Q2.
Answer to Question: 3
In short run, the price elasticity of demand is 0.15, which is about 0.5 in the long run. This
signifies that in the long run the price elasticity of demand would be more elastic in comparison
with the short rub value. Elasticity determines the degree of change in quantity demanded with
respect to change in price.

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Figure 3: Inelastic demand for electricity in short-run
In the short run, the demand is relatively less elastic or inelastic meaning that demand is
less responsive to price. Long run elasticity signifies that demand for goods would be more
elastic to price change such that the amount of fall in quantity demanded would be more than the
rise in place (Mankiw, 2016).
Figure 4: Long-run price elasticity of electricity
The long-run price elasticity of demand is flatter than the short run because in long run,
there are more number of firms who are able to produce substitute products. In short-run people

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does not have much options and a price change would not change their demand in greater
proportions.
Answer to Question: 4
Table 1: Calculation of marginal cost and average cost of the firm
Answer a
In the short run, competitive firms would charge same price and still earn super normal
profits because there are fewer cherry firms in the industry. When the price is $8, the average
cost is lesser than the marginal cost, meaning that firm with gather super normal profit in the
short run as they would benefit from lower average cost (Zeuthen, 2018). With, passing time
news firms would enter in the market because of free entry and exit relationship between the
firms which would change the overall profit and output of firms. In long run, Hank and Helen
would have more rival firms producing the same good which would lower the demand for their
products and therefore, they need to set price below 8 dollars.
Answer b
When Hank and Helen are able to lower their price from 8 dollar to 3.75 dollar, the
demand for their cherries would go up in the market. However, the average cost exceeds the

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marginal cost, even in the short run where AC is $5.5 and MC is $4. Firms would run in loss as
their average cost exceeds the marginal cost. They would not be able to operate the firms for
longer time span as they won’t be able to generate profit which is used to buy inputs for further
productions. In the long run, firms of Hank and Helen would stop working as and shut down due
to repetitive losses in the short run (Dupraz, 2016).

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Reference List
Bertoletti, P., & Etro, F. (2016). Monopolistic competition when income matters. The Economic
Journal, 127(603), 1217-1243.
Cattani, G., Porac, J. F., & Thomas, H. (2017). Categories and competition. Strategic
Management Journal, 38(1), 64-92.
Dupraz, S. (2016). A Kinked-Demand Theory of Price Rigidity. mimeo, Columbia University.
Geroski, P. G., & Jacquemin, A. (2013). Barriers to entry and strategic competition. Routledge.
Knittel, C. R., & Pindyck, R. S. (2016). The simple economics of commodity price
speculation. American Economic Journal: Macroeconomics, 8(2), 85-110.
Mankiw, N.G., 2016. Principles of economics. Cengage Learning.
Scitovsky, T. (2013). Welfare & Competition. Routledge.
Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge.