Business Economics | Question and Answer

Running head: Business Economics
BUSINESS ECONOMICS
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
AUTHOR NOTE

1BUSINESS ECONOMICS
Table of Contents
Introduction......................................................................................................................................2
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................5
Answer to question 3.......................................................................................................................7
Answer to question 4:......................................................................................................................8
Answer to question 5.....................................................................................................................10
Answer to question 6.....................................................................................................................12
Answer to question 7.....................................................................................................................14
Answer to question 8:....................................................................................................................16
Answer to question 9:....................................................................................................................18
Answer to question 10:..................................................................................................................20
Answer to question 11:..................................................................................................................22
Answer to question 12...................................................................................................................24
Answer to question 13:..................................................................................................................26
Answer to Question 14..................................................................................................................27
Answer to question 15:..................................................................................................................29
Conclusion.....................................................................................................................................30
References......................................................................................................................................32

2BUSINESS ECONOMICS
Introduction
Business economics is the field that studies the financial, organizational and market-
related issues faced by the companies. Theories of the economic and quantitative methods are
utilized to measure and access the factors that are affecting the corporation — the role of
government for the regulation, the impact of business expansion over the entrepreneurs.
Therefore, the study is based on business economics. Therefore, further discussion will be made
on the topics of the monopolized industries, exchange rates and its effect over the capital
outflows, grim theory and its promotion of collusive behavior. Explanation of the AD-IA
framework in the closed economy. Effects of price flooring in the competitive market and how to
regulate the vertically integrated companies and other various tax-related subsidy related and
different other topics has been elaborated.
Answer to question 1
Monopoly is said to happen in the situation when there is just a specific supplier of the
specific commodity, where they feel little or no competition of substitutes and production of
goods and services. A monopoly is a situation where the market possesses certain power, which
is the power to charge high prices since the demand of the product is high and the supplier gets
limited to very limited or maybe one. In a monopolistic market, the price will be set by the seller
for the goods and services. In this scenario, the goods will be priced higher and the quantity of
the available goods will be lower (Fumagalli and Motta 2019).This is what makes the goods a
commodity.

3BUSINESS ECONOMICS
Monopoly will further result in the formation of deadweight loss since the firm waves the
transaction with the consumers. The deadweight loss is the gains that do not go to the producers
of the goods or consumers rather it is a loss of economic efficiency which can occur when
equilibrium for goods and services is not on Pareto optimal ( Devereux,Young and Yu 2019).
When a good or services is not on Pareto optimal, then the efficiency of the economy is not at
equilibrium. Therefore, when the resources are allocated, it creates difficulty in making an
individual person better without making the other at least one person, the worst. In the situation
of deadweight loss, there is a loss of economic surplus. Deadweight loss creates market
inefficiency and is the result of the condition where the market is unable to clear it naturally.
Therefore the demand and supply of the goods are not at equilibrium. Below is the diagram to
show the deadweight loss Fig-1.

4BUSINESS ECONOMICS
Fig 1- The graph shows the deadweight loss due to the binding price ceiling.
As compared to the competitive environment, a monopoly is lesser efficient in earning of
total gains from the trade activity. Since, in the monopolistic market, there are no competition
from other producers in the market place and therefore, it is expected that the monopoly may loss
its efficiency and the zest to new innovation over the period of time. Smugness among the
private monopolies might lead to the new entrants to take over the market, when the new entrants
will be able to enter the market and be capable enough to break all the barriers related to their
entry into the market. Along with that, long-term substitutes can make way in the market when
the monopoly became inefficient. In the situation of monopoly, abusing the power of monopoly,
will ultimately lead to the failure of the market. Failure of the market occurs, when the goods and
services allocation, by a free market, is not Pareto efficient, which makes way for the net loss of
the economic value. Monopoly is the imperfect market which restricts output in the attempt to
maximization of profit. Market failure in monopoly might occur when not enough goods will be
available or when the price of the goods will be too high. In the absence of the market competitor
it is difficult as well as challenging for the monopoly to self-regulate and remain competitive
over time. Further graphs to show various indication of monopolistic market. Fig 2 , Fig 3 and
Fig 4 :-

5BUSINESS ECONOMICS
Fig 2
Fig-3

6BUSINESS ECONOMICS
Fig-4
Answer to question 2
When the country made use of the widely used currency and the commodity and ties it
with the exchange rate and fixed it up, those countries are said to have a fixed exchange rate. The
dollar is one of the most used currencies where international trade is involved. Most fixed
exchange rates are tagged with US dollars. A fixed exchange rate tells that one can exchange
money in one currency with the same amount of the other country currency. Stability is provided
by the fixed exchange rate and investors always have an idea of the worth of the currency which
leads to more attraction towards the business of the country for foreign direct investors. Inflation
can be avoided by the country, if currency of the country is set to the widely used currency like
the US dollar or euro (Chen 2019).
Movement of the asset of the country to another is termed as the outflow of capital.
Outflow of capital is always not desirable as it mostly happen as the result of the political and
economic instability of the country. The movement of assets is said to be happen when the
investors from the foreign or even the domestic ones involve in the selling of their holdings in a

7BUSINESS ECONOMICS
specific country because they think that the economy of that country is getting weakened and
they believe that better opportunities exist abroad.
The Russian, East Asian as well as Brazilian currency crisis in the year 1990, it has been
observed by the economist that the main reason or maybe the contributing factor behind this is
the liberalization of the capital outflow along with the fixed exchange rate. (Radelet and Sachs
1998). Therefore, this further concludes that the common prescription that we can draw from
this argument is to restrict the capital flow and other payments that will be internationally based
on the hope to protect the economy from speculative attacks and therefore, creating greater
currency stability. Restricting the flow of capital internationally refers to the restriction of
purchase and sales of domestic assets by domestic residents and similarly, restriction of the
purchase of domestic assets by residents of the foreign country. Restrictions over the capital
inflow and outflow have a long history in a reduction of instability of the finances as well as the
macroeconomics of the country. However, it has been observed that capital control have a
destabilizing effect on exchange rates as well because the restriction on the movement of
international capital may themselves lead to the capital outflow and sudden increased the
instability of the finances (Steinberg and Nelson 2019). Restricting investors from taking capital
from the country thus further lead to the investment irreversibility as their willingness to invest
in that country declines. The imposition of capital control shows the inconsistent and poorly
designed government policies, which ultimately makes the country to be more vulnerable to the
currency crisis.
It has been observed that the restriction on the international outflow often associates with
the higher exchange rate crisis. Therefore the countries where there is little or no capital control,
seems to have stable exchange rates and face fewer speculative attacks. It has also indicated that

8BUSINESS ECONOMICS
the environment where the capital account of the company is seem to be more liberalized, it
appears to fight the vulnerability of the instability of exchange rate.
Answer to question 3
A trigger applied for a repeated game in game theory is called a grim trigger. Here, the
person initially cooperates with the opponent but as soon as the opponent defects, the person
utilizing the game theory will also defect and will continue to do so throughout the game. Grim
theory in economics, founded by Friedman, is often used in the economic model in order to show
the collusion, which can be sustained by means of a sub-game perfect equilibrium.
Grim theory starts with the high price, then drop its price for all the future periods, in
case, if the other firm chooses low prices. The firm monitor their prices along with all their
competitors and then the firm who is playing the game theory will, at first, increase their prices
in the market and then compromise it by lowering the prices for the remainder of the period. This
happens when the other firm chooses low prices and therefore, the firm involved in the grim
theory lower their prices as well. The firm gives disincentive to the firm to cut down the prices,
which will get punished in the future. It is a tit-for-tat game, where the one-party who has got
deceived by the other party or firm, will in the future, gets deceived by the other party of the
firm. However, it enables us to fix the price in a better way as it is easier to monitor the prices of
the rivals and therefore, it gets easier to monitor as well as fix the prices (Cason and Mui 2019).
Firms can engineer the art of monitoring the prices of the rivals and fixing their prices
with the help of “meet the competition” clauses. In the meet the competition structure, it is a
contractual agreement between the customer and the company, where the company decided
whether they want to have the customer business or not. Since the company knows the bid

9BUSINESS ECONOMICS
amount that they need to bid in order to beat the other company and win the business, they get
that privilege to choose their business and customer ( Dal and Fréchette 2019). They get an
opportunity to get away with the guessing game and also it reduces the incentive for the
competitors to bid. Therefore, the meet the competition clause doesn’t force to meet the
competition; rather, it simply rewards the person who is utilizing it. It is therefore clear that in
the simple situation while retaining the sub-game perfection, it is possible to improve the grim
trigger strategy and in few cases adding the renegotiation practices does the same work.
Answer to question 4:
AD-IA model (Aggregate Demand- Inflation Adjustment) is used to explain the
economic fluctuations. The model shows the shifting of the demand curve or the shocks to the
price that affects the real GDP of the economy. The model also assumes that inflation rises with
the rise in the interest rate. Real GDP can exceed the average properity sometimes, then there
will be an upward shift in inflation rate, reverse action can also occur. The model shows one
downward sloping demand curve (AD) and one horizontal inflation adjustment line (IA). The
intersection point of the demand curve and inflation adjustment line is the point that shows a
potential GDP. If any of the curve shifts then the impact will reflect on the real GDP as well as
the inflation rate in the short run (Economicshelp.org 2019).
In a closed economy, it assumed that the price of the output is initially set on the natural
rate or the aggregate rate. The government of that economy has decided to reduce its spending on
the economic welfare to improve the economic growth. Now with the help of AD-IA model, the
welfare of the economy can improve. The inflation rate can adjusted accordingly as the AD-IA
model also depends upon assumption on guidelines of monetary policy. Interest rate can increase
in the closed economy that will control the inflation and the purchasing power of the customers

10BUSINESS ECONOMICS
will be minimised. The output will sell less that will shift the demand curve as well which will
bring the closed economy again in the equilibrium point (The Economic Times 2019).
When government of the closed economy reduces, it's spending on the economy, then
there will be less investment for the betterment of the nation. Less government spending also
means that the money is being invested somewhere for the long-term benefit of the economy in
the future.
It is cutting down government spending in a closed economy can also lower economic
growth. Government spending is a part of aggregate demand (AD) so if there is a reduction in
government spending, then AD will be moderate which affects the gross demand. The
government budget deficit will also reduce. As the demand is low, the demand for the price will
also be low because of the same natural rate it is sold (Sparknotes.com 2019). The less demand
for that specific output will result in less cash flow in the closed economy and less cash flow will
result in controlling the inflation to a higher rate because in a closed economy, it is quite natural
for the government to control the inflation rate.
When a government starts spending less in a closed economy keeping the price of output
at its natural rate, the result will be beneficial for the economy because the inflation rate will be
under control, excess demand or supply can control and the economic welfare will be more. The
benefits will be reflected on a long-term basis and sometimes on a short-term basis. Many other
components related to the aggregate demand also directly or indirectly affected by government
spending in the economy (Revolvy.com 2019).

11BUSINESS ECONOMICS
Answer to question 5
If the price floor is set above the market equilibrium price that means that the consumer
has to pay more for the goods and services that they would have paid if the market would have
been set on the market principles in the free market. The price floor is usually set for a lot of
reasons. However, the government sets the price floor to suppress the demand and increase the
supply. There can be different effects of price flooring depending on the policies of the
government. If the government decides on purchasing specific maximum unsold goods at the
price floor, it will ultimately benefit the business by intensifies its profits and increase their
supply and even allow them to stay in the industry despite their slow sales. The government
usually do this for the areas where they think that is politically or strategically correct. For
example, agriculture so that they can prevent which they are considering that they are getting
unfairly low prices for their products. If the government decides to put the price floor for the
coffee plantation and then decide to purchase a certain amount of their surplus at that rate. It will
ultimately lead to the encouragement among the coffee growers as they will try to maintain their
operations by placing the appropriate hedge against the price fluctuations. However, the coffee
shop owner will have to pay more for those coffee beans, though they will have an abundance of
supply (Hsieh,2019).
Due to the prices of the product getting higher with price flooring, customers will prefer
to buy them at the minimum price point, which will lead to the extra surplus of the goods
available for sale. The government may keep the goods till the time the prices increases above
the mandatory minimum. For all the other time and another surplus, they might dispose of the
product in another way like they might give away the agricultural surplus to those institutions
who feed the hungry. The flooring of prices affects the small businesses where the minimum

12BUSINESS ECONOMICS
wage is a classic example. The business has to pay the wages to the employees which that
government think is perfect irrespective of what the market dictates. This lead to disincentivize
of the business from hiring the amount of low-skilled labor they want to hire. The government
also set floor prices for those areas which fall under their jurisdiction. In order to win the federal
government contract, the government will have to adhere to the minimum wage that has been
mandated for the contractor. The bidding cost for the projects rises, depending on the
requirement of skills and how much the worker is getting paid, making it a futile bid. It has been
debated that since the floor price reduces market efficiency; however, it does not make it a bad
policy. This is since the government usually implement the floor price to have a valuable
consequence and not just the monetary income. For example, if the government impose the price
floor over the parking area, then the price that the people are paying to park their car in that
parking lot will be higher than the market otherwise dictate. Therefore, this will lead to the
emptiness of the parking lots; however, it will meet the other requirement of the municipality
like it will lead to lesser congestion and it can also encourage the residents to walk more.
Therefore, in the competitive environment, the price floor will lead to more supply and less
demand for the product and will lead to the surplus of the goods, as summarized in the graph
below Fig-5:-
Fig 5
Answer to question 6
As per the economics, vertical
integration is such an arrangement, where
the company owns the supply chain.

13BUSINESS ECONOMICS
Therefore, each of the supply chains produces a specific product and then each product is merged
to satisfy the basic need. It is then differentiated with the horizontal integration where the firm do
the production of several goods within a particular supply chain. The firm might do this through
internal expansion or the merger of the company. Therefore, vertical integration is that
management style which helps in bringing different supply chains together under one ownership,
for example, the electricity supply chain where the electricity company owns the supply chain of
electricity generation, distribution and supply. A monopoly which is produced by the vertically
integrated companies is called vertical monopoly.
Although the vertical industry can help in the reduction of the cost and improvement in
the efficiency; however, it has to be noted that there is huge capital expenditure involved in the
implementation of the vertical integration. It helps in the decrease of the transportation and the
overall turnaround times, reduction in the suppliers supply disruptions thereby, helping from not
falling into the financial hardship. It helps in increasing competitiveness by availing the products
directly to the customers, lowering the cost through the usage of economies of scale, which helps
in lowering the per-unit cost by purchasing the material in bulk. However, the company gets too
big, and management of the company along their supplier can be hectic as well as expensive.

14BUSINESS ECONOMICS
Fig -6
In this study, the example of UK electricity supply has been taken (fig-6), which has been
historically established since (1940-1990). The market of the company was supplied by the
vertically integrated monopoly. The prices were set at the estimated marginal cost. It has been
believed that the company has been a natural monopoly; however, the electricity generation and
the supply of the company, where the supply contracts are renewed and made and the customer
billing is done, is not a natural monopoly. Though the distribution network of the company has a
natural monopoly. Restructuring of the market has been done such a way which will allow
markets to develop at generation and supply stages; however, distribution remains as the
regulated monopoly. Generators have been allowed to sell directly to the suppliers or through the
pool system. Researches have shown that the average cost has fallen by fifty per cent and six
billion euros increase in social welfare. Therefore, if the monopolist is more efficient in
downstream production, the monopolist obtains a higher price-cost margin. However, a welfare

15BUSINESS ECONOMICS
comparison of liberalization and vertical separation depends on whether the reduction in the
duplication of fixed costs dominates the greater price-cost margin.
Answer to question 7
Easy movement of the physical asset and finance across the geographical borders is
termed as the capital movement. Capital generally refers to the physical capital and the physical
capital, which gets determined by the levels of investment. Understanding the phrase capital,
financial capital or short-term capital comes into the picture as well, which is money or a liquid
asset. A multinational company may take advantage of the higher interest rates of the other
country like they might shift their capital to Australia in order to gain more interest. Therefore,
the flow of capital will include foreign direct investment, portfolio flows which are the short-
term capital like taking advantage of different interest rates of other countries along with that
moving one's savings account to other countries. The flow of capital also includes the flow of
bank transfer from one country to another ( Andreasen, Schindler and Valenzuela 2019).
If the capital is mobile, then it becomes easier to transfer capital from one country to
another and perfect capital mobility will allow mobility of capital from one country to another
with almost no transaction or any other cost. The flow of capital increases due to a higher supply
of funds and because of the greater competition among the fund managers following the financial
market liberalization.
If the capital of the country is mobile, then it will be easier to attract foreign direct
investment from other countries. It also leads to increased investment opportunities in other
countries. It becomes easier to gain higher interest rates and gains by moving the financial
capital, in the environment of free capital movement. It leads to purchasing power parity as if the

16BUSINESS ECONOMICS
capital of the country is mobile it leads to the reduction in the differences in real exchange rates.
For example, if the goods are cheaper in China people, it will encourage people to purchase the
product there and do the fund transfer to the low cost countries. With the help of international
mobility or in order word with perfect capital mobility, it will attract the developed countries to
invest in the developing countries, which has low wage rates. Therefore, the capital inflow from
the developed countries will help in the increase in the economies of the developing nation. The
below graph will understand the further unrestricted flow of international capital. Fig 7
Fig7
Along with that, the other effects of the capita flow will be the cause volatility, which is
the degree of variation of the trading price series, which is measured by the standard deviation of
logarithmic returns. The flow of capital further helps in the induction of the government
probities, where they make sure all the steps they take or policies they make are fair and
righteous. Further, there will be an inflationary effect by means flow of capital since it will lead
to an increase in purchasing power. Therefore the demand for the products will rise, along with
that the price of the product will also rise to lead to inflation. However, the free flow of capital

17BUSINESS ECONOMICS
will lead to the advancement and bridging the gap between the developing and the developed
countries, and therefore, it is advisable to imply this (Khatat and Veyrune 2019).
Answer to question 8:
The principle of Comparative advantage shows that every agent produces more and
consumes less of any product, which provides the agents with comparative advantage under free
trade (Johnson 2017).
Ricardo’s model of comparative advantage can explain with a typical example of a world
economy where Ricardo considers two countries existing in the England, world economy and
Portugal. Let both countries produce two products with identical quality (Economics Discussion
2019). The producers in Portugal has the capability of producing wine and cloth under very
fewer labor costs. In contrast, same production quantity in England would cost much more as the
production cost and labor cost is more in England than Portugal. However, the relative value will
be different in both countries. Let the necessary working hours to produce one unit is:
Fig-8

18BUSINESS ECONOMICS
In the table (Fig -8), it illustrated that England could manufacture almost one unit of cloth
by employing 100 working hours they can produce 5/6 units of wine. Whereas Portugal can
provide one unit of cloth by employing 90 hours of labor or they can manufacture 9/8 units of
wine. From the graph, it has shown that in case I, both the countries can spend almost 3600
working hours for the production of cloth and wine both. In case II, it is shown that both the
countries specializes in comparative advantage which results in more production Here, Portugal
has the ability for manufacturing cloth with less labor hour and that is an absolute advantage for
them. However, England can provide cloth with less opportunity cost and that is a comparative
advantage for them. To produce as well as consume cloth & wine both, England needs almost
220 working hours. Whereas Portugal only needs 170 hours as working hours to produce as well
as consume the equal quantity of wine and cloth. England can efficiently produce wine more
than cloth, but Portugal can efficiently produce cloth more than wine. If both the countries
specialize in specific goods for which they both individually possess a comparative advantage.
Both the countries will have global production on cloth and wine as specified products increased.
On the one hand, England can spend up to 220 working hours for the production of
almost 2.2 units of cloth and Portugal can spend nearly 170 working hours for the production of
2.125 units of wine. Suppose both countries maintain this ratio, then England can exchange one
unit of cloth for 5/6 with 9/8 units of wine from Portugal. By maintaining this trade exchange
ratio, both countries can utilize both the goods by consuming the minimum of one unit of both
cloth & wine. The rate will be 0 to 0.125 units of wine and 0 to 0.2 units of cloth remaining in
each of the countries to utilize or export. By this method, both the countries (England and
Portugal) can use or take more of both the goods under permitted trade.

19BUSINESS ECONOMICS
Therefore, the principle of David Ricardo’s comparative advantage suggests, every
countries should involve trade and exporting with one another so that they have a relative
advantage in their productivity. By engaging the business between them, all the countries can
stand to gain from free trade (Heijdra 2017).
Answer to question 9:
Tax is the extra amount that the producers have to pay when they sell one additional unit
to the consumers. Tax is imposed to control the consumption of any specific good. Customers
have to pay the tax when they buy products from the producers. Subsidy for producers, on the
other hand, can say to be the subsidy amount or discount that they get from the government for
every unit they sell. The imposition of subsidy increases the consumption of any specific
product. The consumers get subsidy like a lower price on the products they buy
(Smallbusiness.chron.com 2019). Economic welfare can be possible by imposing tax & subsidies
in the economy, which is explained in the below graph (Fig-9).
Fig-9

20BUSINESS ECONOMICS
From the above graph, the tax imposed is shown with a red line and it shows that Ps is
taken as price that suppliers receive from selling a product and Pc is taken as price, which
consumers pay for buying the product. When the tax is imposed and the price is higher, the
demand gradually decreases, and the supply increases. The fall in demand and a rise in supply
meets at a point where the price is equal to P*. The imposition of tax gradually increases the
supply of product and excess demand for product in economy. The tax that should give to
government is equal to (B+C). The loss for the government will be similar to (E+F), which will
be deadweight loss of tax. Therefore the economy will face failure in surplus when tax imposes
on markets and brings the economy back to equilibrium.
Fig-10
The above graph (Fig-10) shows the imposition of subsidy with a red line. Consumers
pay the Pc and suppliers receives the price Ps that are equal to Pc+ subsidy. When the
government imposes subsidy on the product, the product price falls and product demand
decreases. Equally, the supply of the product increases as the price for the producer's rises. The
output increases and the fall on-demand with growth on the supply meet at the price P where the

21BUSINESS ECONOMICS
supplier is ready to sell the product and consumer is prepared to buy. The government spends
money on subsidy equal to (B+C+E+F+G+H), which helps the economy to decrease the surplus.
When the quantity is Q with the subsidy, the price is at Ps for the suppliers, the subsidy for the
producer is equal to (B+C+D+E), and the subsidy for the consumer is similar to (A+B+C+F+H).
The government subsidy is G that also said as a deadweight loss. Therefore introducing subsidy
in the market can lower the economic surplus that will bring economic welfare.
Answer to question 10:
When any country fixes its currency exchange rate with another foreign currency by
imposing some macroeconomic policy options, then the supply of excess foreign exchange can
be decreased. For example- let the United States fix their exchange rate to the British pound at
price of .
Fig-11
As shown in above graph (Fig-11), suppose the economy of the US initially shows an
equilibrium at point F and originally generated gross national product (GNP) at level Y1. Let the
central bank of the US ( the Fed) has decided that money supply of the country should be

22BUSINESS ECONOMICS
expanded and changes in monetary policy shall be made by introducing open market operations
(Ceteris paribus) it specifies that all external variables can be assumed to hold the original rates
(Cooper 2014).
Now, the central bank of the US that is the Fed has decided to purchase a treasury bond,
which means that there will be increase in money supply. From the above graph, it can see that
the money supply of the country has changed which has resulted in the shift of the demand curve
that is the AA curve. The shifted demand curve is referred to as A’A’. The curve has moved to
the upward and the reason for the upward shift is the money supply of the US currency. The AA
curve is depicted with a red color and the A’A’ curve has drawn with a blue color. The currency
exchange rate fluctuates due to increment in money supply. The price of return on the assets of
the US lowers than Britain’s rate of return of similar assets. The demand for pound will increase
for exchange with dollars on Private Forex, which will allow the international investors to take
advantage of the british assets at higher rate of return.
However, as the US government maintains the fixed exchange rate and the excess
demand on pounds at private Forex somehow central bank of the country will intervein for
relieving it. Now, excess demand of pounds will be supplied by Fed by selling the pound
reserves for dollars at fixed exchange rate. The supply of money of the US is increased by the
purchase of foreign currency by the Fed. The reason behind this is that the Fed has sold the
dollars to the private Forex; the dollars are going to circulate and then money supply becomes a
part of it . The increment of money supply will result in shifting upward of the AA curve. The
money supply equilibrium is met where A’A’ curve intersects with the D’D’ curve at its fixed
exchange rate which is shown as the point K in the graph. The increment in the money
supply will lower the interest rates and that will come back to initial level which will help to

23BUSINESS ECONOMICS
retain fixed exchange interest rate parity (IRP) conditions at . So the expansionary fiscal
policy results in the increment in GNP, and there will be zero change in the short run regarding
the exchange rate.
While the contractionary fiscal policy is dependent on the government spending less
investment, decrement in the transfer payments or increment in the tax imposed. This activity is
also represented as increment in government budget surplus or decrement in budget deficit. The
effects of contractionary fiscal policy will be the opposite of the expansionary fiscal policy.
Answer to question 11:
Surge pricing used by Uber means to adjust the prices of the customer’s to match with the
supply of drivers with a customer’s demand at any point of time. When the surge pricing is
active, Uber’s passengers will be informed that the fares would get higher. If the rider accepts
with this condition to pay the amount, then the driver dispatches to pick the passenger. There
were many complaints regarding surge pricing by Uber as the prices become higher a lot
(Marketplace.uber.com 2019).
If the surge pricing is stopped, then there will be many advantages as well as
disadvantages. The benefits include the increase in demand and less exploitation of the riders
because when the surge price was active, people use to hesitate before booking a cab for them
because the surge pricing method may increase the price of the ride. If the surge price is stopped,
then the demand will increase for the customers that will increase the revenue for the Uber.
When Uber uses the surge pricing method, then it is stated that the new pricing increases the tax
revenue for the government which in return increases the economic welfare, but when this surge
pricing method has stopped the demand for online cab booking increases that increases the

24BUSINESS ECONOMICS
revenue for Uber. Growth in the income will improve the economic welfare of the country
because there will be a high demand for Uber drivers, which will increase the employment rate
of that nation (Web.stanford.edu 2019).
Surge pricing may be beneficial in the long run for the company, but in the short run
without any regulations on the surge pricing method, the company may lose its customers due to
the substantial prices. The riders in need of a cab may feel that they are being exploited due to
their urgent need. Surge pricing, therefore, should be prohibited entirely from every nation so
that the relation of the company with their customers is not hampered and the retention of the
customers remains intact. The prohibition will stop the exploitation of the customers. The
revenue of the company will also increase because of the surge pricing is removed, then the
demand of the customers will increase; ultimately, the income of the company will grow. The
prices will be fixed, which will reduce the fluctuation of the fare to any extent.
When the surge price is prohibited, then there will be increment in the demand of their
economy. An increment in the demand will also rise the demand for drivers and cabs in the
market. Many people will hire for meeting the excess demand that will increase the employment
for that economy. An increase in employment will improve economic welfare.
Answer to question 12
The movement of the physical asset and finance across the geographical borders is
termed as the movement of capital. The level of investment determines the physical capital
which is generated by the business and the same involves physical capital. The money or the
liquid asset used by the business are termed as the short-term capital and the same forms part of
current assets of a business. A MNC may take advantage of moving their financial capital from

25BUSINESS ECONOMICS
one country to another in order to take benefits of the higher rate of interest applicable on that
country, for example Europe and Australia. Foreign direct investment and the portfolio which
forms a part of the short-term capital are utilized to take the advantages of various rates
applicable in different countries along with that people also transferred their funds to the other
countries to take advantage of the high rates prevailing there.
Therefore in a country where the capital mobilization is accurate and efficient, it will
further attract other countries for the Foreign Direct Investment and for other investment
opportunities. People will find it easier to invest when there is liberal laws related to the financial
movement in and outside the countries. Purchasing parity of the consumers will increase and
ultimately the differences between the exchange rates will reduce significantly among different
countries.
Allocation of the capital termed as the distribution and investment of the company’s
financial resources in such a way that will lead to increase of the company’s efficiency and
maximization of its profit. It is always desirable by the management of the company to allocate
its capital and other resources in such a way so as to generate maximum wealth for the
shareholder of the company. However, the characteristic of the efficient market is termed as the
allocational efficiency, where the capital is allocated in such a way so as to give the maximum
benefits to the shareholders or the parties involved in the business activities. An optimal
distribution of the goods and services for the consumers in an economy are termed as the
allocational efficiency. Whereas, the excellent financial distribution of the company’s capital to
its investors also comes under the efficient allocation.
Allocational efficiency is determined when the company in private or public sector will
be able to spend their resources in those projects which will enable them to earn most of the

26BUSINESS ECONOMICS
profits and also would be beneficial for the population as a whole, ultimately leading to the
economic growth of the country. As per economics, allocative efficiency occurs when the
demand and the supply curves intersect each other. At the point of the equilibrium, the price that
is offered for the particular supply of goods or services in an economy matches exactly with the
demand for those goods and services at that given price and therefore, it lead to the sale of all the
goods and the services. Therefore, free movement of capital can definitely lead to the efficient
global allocation of the capital, as the variety and the financial movement will be immense.
However, it has to be noted that there requires certain regulation and control so that there will be
track to monitor and nothing can go haphazardly.
Answer to question 13:
A closed economy is the type of economy where there is no trade exchange with other
foreign economies. When any country declares themselves as a closed economy, it means that
they are self-sufficient, they do not import any product from other countries, nor do they export
any product to other countries. The main aim of regulating the closed economy is to provide the
domestic producers with all the resources they need for growth from inside the country’s borders
(Philippopoulos, Varthalitis and Vassilatos 2015).
Tight monetary policy involves the actions by the Central Bank of the nation to control
the sudden inflation rate with different tools and market factors like discount rates and to
increase the interest rates in the economy. This method used to curb the inflation rate in the
economy. When this method applied in the closed economy, then there will be a lot of changes in
the economy, which will impact the closed market also (Economicshelp.org 2019).

27BUSINESS ECONOMICS
When the inflation rate of the closed economy increases then the prices rise for the
wholesalers, later adopting the tight monetary policy by the Central bank of the nation to
increase the monetary value and to stop the use of any tool that improves the inflation can
decrease. Whereas excess tightening of monetary policy can result in deflation
(www.dictionary.com 2019).
The application of monetary policy can affect the interest rate of the closed economy by
increasing the time lags that will increase the demand for mortgage and less cash flow in the
economy. Borrowing money will be less so that people will have less cash. If there is cost-push
inflation, then the increase in the interest rate can further lower economic growth. There is also a
chance that due to the high-interest rate, the employment of the economy may also decrease.
When there is a high inflation rate in the closed economy, then Central bank can increase
the short-term interest rate on investment to control inflation. People will start to invest their
money more and gradually decrease the inflation rate.
In tight monetary policy, the prices of the products increases and so the producers
hesitate to produce more. The costs of the raw materials increases and the final product become
quite unaffordable. In a closed economy where they do not import or export their products to
other countries, it becomes quite severe for the consumers as well to find a cheaper substitute for
the product. The production of the output, as well as the consumption of the output, decreases
due to the rising price.
Controlling the inflation rate in the closed economy is very impactful as well as fast as
they do not import or export any product and service form the foreign countries. Therefore, the
people of such an economy does not have an option to substitute the high rated product with any

28BUSINESS ECONOMICS
other exported cheaper products. The inflation rate can control in the closed economy by
increasing the interest rate so that there will be less cash flow in the economy. Less cash flow in
the economy can result in less requirement of products that will gradually decrease the demand
and increase the money value in the market. Increment in the money value will ultimately reduce
the prices of the outputs.
Answer to Question 14
Monopoly is such a structure of the market which consists of multiple consumers and only a
single seller. In this structure, the seller sells a unique type of product or provides a unique
service. This sort of market structure is not much desirable since here the seller has full control
over the goods he sells. He is the price maker. The buyers don’t have any say on the price set by
the sellers and have to purchase the product at the price which is decided by the seller (Dunne et
al. 2013). Since there is no competition in the market which the seller has to face, so he can set
the price at whatever rate he wants without taking buyers concerns into account. The seller has
the upper hand in a monopoly since the product which he sells is entirely unique and it does not
have any close substitute. The seller has certain information regarding the product with himself
which is not known to any other seller in the whole market. This enables the seller in establishing
a dominant place in the market. In the monopoly, the seller can hike the price of the product
according to his will since there is not any fear of competition existing in the market place. There
is a high possibility of price discrimination in case of monopoly (Chen and Schwartz 2013). This
feature of the market allows the seller to alternate the price as well as quantity of the product he
sells or service which he provides for different buyers. The buyer does not have an option of
shifting to other substitutes in the monopoly market structure. It restricts any new firm from
making an entry in the industry. Therefore it can be said that in the case of monopoly, a firm, as

29BUSINESS ECONOMICS
well as an industry both, are the same. The market power lies in the hand of the seller in
monopoly. The monopolist sometimes can sell a product at such a price rate which causes the
buyers to get exploited. There is also a possibility of monopolists selling inferior products to the
consumers in some cases.
The monopolist is the sole owner of all the resources and holds government license along
with patent right and copyright of the product he sells or the service which he provides. A
monopolist firm despite having all these drawbacks, does offer a few advantages as well. The
prices of products and services in case of monopoly are mostly stable since there is only a single
seller in monopoly who fixes the price of the product as well as service. Monopoly offers
economies of scale. Since the monopolist is the only seller in the market and does not have
competitors, so he has a high chance of earning high profit. The monopolist has possibilities of
using this profit for investment in various types of technology which can improve the product
quality. Monopoly gives the opportunity of economies of scale due to which the cost of
production becomes low and hence the buyers can avail the product or the service at a low price
(Zeuthen 2018).
Answer to question 15:
Policy trilemma stated as one of the terms used in the economic decision-making theory.
In trilemma, there are three possible options from which the fundamental decisions can be taken
for managing the international monetary policy agreements. The three choices of trilemma may
conflict with each other due to their mutual exclusivity, and that is why at a time, only one option
is achievable of the trilemma.

30BUSINESS ECONOMICS
When the government of any nation decides to fix their currency, then it has done to keep
the value of its currency within a set band. Capital control includes the activities related to
exchange commands that restrict the purchasing as well as the selling of the national currency at
the specified market rate. Restrictions imposed on the international purchase and sale on
different types of financial assets, transaction taxes on the currency rates, and requirement of
minimum stay, mandatory approval requirement, or limiting the amount of money any citizen
allowed to remove from the nation. Whereas ineffective monetary policy means the situation at
which the policymakers of the government decides to increase the nominal interest rates in the
country’s economy by just altering the nominal money supply (InfoPlease 2019).
When the exchange rates of any large developing country fixed, then the economy needs
a high boost to improve its economic growth and to retain the growth as well. Most of the time
the decision-makers of the developing country chooses methods like capital control or ineffective
monetary policy because then there will be restrictions on the import and export of the national
currency with the other foreign countries. Here, the fixed exchange rate can benefit the large
developing country by the exchange of the national currency. Adoption of ineffective monetary
policy by the developing country will restrict the country from importing or export any financial
assets and putting a cap over the transaction of the national currency with other currencies. The
citizens of that large developing country are also restricted with a limit to remove or transfer the
national currency in the outer countries. These methods use to keep the national currency inside
the country so that the money value of the currency increases and the country becomes more
self-sufficient (World Economic Forum 2019). The decision of capital control or ineffective
monetary policy by the developing country is very vital to control or limit the power of the
foreigner's buy any domestic asset at a low cost. The control on the purchasing power of the

31BUSINESS ECONOMICS
foreigners can also state as to increase the safety of the economy and to increase the self-
sufficiency of the economy by influencing the economic progress. As the security and the
resource will increase for the domestic producers, the economic activities will also improve,
which will benefit the large developing country to spend more for the betterment and to improve
their monetary value in the global market. There will be more transparency, and the inflation rate
will be under control, which is a must requirement for any large developing country.
Conclusion
It has to be concluded that from the study of different scenarios of the business
economics that, with the help of business economics, overall issues faced by the corporations can
be dealt well. The major nucleus of the economic theory is the optimal allocation. Therefore, in
the above discussion, the monopolistic market and its efficiency has been evaluated, game theory
with respect to grim trigger has been discussed and other theory of Ricardo for competitive
advantage and various other topics has been discussed and many solutions has been provided,
main objective has been drawn from the study is that along with the consumers the business also
requires protection and therefore various methods are there in the economics to deal with the
problems of the business and bring out the solutions.

32BUSINESS ECONOMICS
References
Aktas, N., Andreou, P.C., Karasamani, I. and Philip, D., 2019. CEO duality, agency costs, and
internal capital allocation efficiency. British Journal of Management, 30(2), pp.473-493.
Andreasen, E., Schindler, M. and Valenzuela, P., 2019. Capital Controls and the Cost of
Debt. IMF Economic Review, 67(2), pp.288-314.
Bamberger, A., 2019. Accumulating cosmopolitan and ethnic identity capital through
international student mobility. Studies in Higher Education, pp.1-13.
Cason, T.N. and Mui, V.L., 2019. Individual versus group choices of repeated game strategies: A
strategy method approach. Games and Economic Behavior, 114, pp.128-145.
Chen, G., 2019. Essays in Capital Controls, Capital Flows, and Exchange Rate
Regimes (Doctoral dissertation, The George Washington University).
Chen, Y. and Schwartz, M., 2013. Product innovation incentives: Monopoly vs. competition.
Journal of Economics & Management Strategy, 22(3), pp.513-528.
Cooper, R.N., 2014. Exchange rate choices.
Dal Bó, P. and Fréchette, G.R., 2019. Strategy Choice in the Infinitely Repeated Prisoner's
Dilemma. American Economic Review, 109(11), pp.3929-52.
Davis, D., 2019. Vertically Integrated Research: An Unusual Business Model. Architectural
Design, 89(3), pp.68-75.
Devereux, M.B., Young, E.R. and Yu, C., 2019. Capital controls and monetary policy in sudden-
stop economies. Journal of Monetary Economics, 103, pp.52-74.

33BUSINESS ECONOMICS
Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of
market structure. The RAND Journal of Economics, 44(3), pp.462-487.
Economics Discussion (2019). David Ricardo’s Theory of Comparative Cost Advantage |
Economics. [online] Economics Discussion. Available at:
http://www.economicsdiscussion.net/economic-theories/comparative-costs-theory/david-
ricardos-theory-of-comparative-cost-advantage-economics/30673 [Accessed 18 Dec. 2019].
Economicshelp.org (2019). Impact of Increasing Government Spending - Economics Help.
[online] Economicshelp.org. Available at:
https://www.economicshelp.org/blog/2731/economics/impact-of-increasing-government-
spending/ [Accessed 18 Dec. 2019].
Economicshelp.org (2019). Tight Monetary Policy - Economics Help. [online]
Economicshelp.org. Available at: https://www.economicshelp.org/blog/glossary/tight-monetary-
policy/ [Accessed 18 Dec. 2019].
Fumagalli, C. and Motta, M., 2019. Tying in evolving industries, when future entry cannot be
deterred. BAFFI CAREFIN Centre Research Paper, (2019-123).
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Hoffmann, M., Krause, M.U. and Tillmann, P., 2019. International capital flows, external assets
and output volatility. Journal of International Economics, 117, pp.242-255.
Hsieh, I.Y.L., Pan, M.S., Chiang, Y.M. and Green, W.H., 2019. Learning only buys you so
much: Practical limits on battery price reduction. Applied Energy, 239, pp.218-224.

34BUSINESS ECONOMICS
InfoPlease (2019). Fiscal Policy and Economic Growth: Government's Unique Situation.
[online] InfoPlease. Available at:
https://www.infoplease.com/homework-help/social-studies/fiscal-policy-and-economic-growth-
governments-unique-situation [Accessed 18 Dec. 2019].
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Khatat, M.E.H. and Veyrune, M.R.M., 2019. Liquidity Management under Fixed Exchange Rate
with Open Capital Account. International Monetary Fund.
Managementstudyguide.com (2019). Capital Controls: Meaning, Types, Benefits and Downside.
[online] Managementstudyguide.com. Available at:
https://www.managementstudyguide.com/capital-controls.htm [Accessed 18 Dec. 2019].
Marketplace.uber.com (2019). Surge pricing | Uber. [online] Marketplace.uber.com. Available
at: https://marketplace.uber.com/pricing/surge-pricing [Accessed 18 Dec. 2019].
Philippopoulos, A., Varthalitis, P. and Vassilatos, V., 2015. Optimal fiscal and monetary policy
action in a closed economy. Economic Modelling, 48, pp.175-188.
Pu, L., Wang, X., Tan, Z., Wu, J., Long, C. and Kong, W., 2019. Feasible electricity price
calculation and environmental benefits analysis of the regional nighttime wind power utilization
in electric heating in Beijing. Journal of cleaner production, 212, pp.1434-1445.
Revolvy.com (2019). "AD–IA model" on Revolvy.com. [online] Revolvy.com. Available at:
https://www.revolvy.com/page/AD%E2%80%93IA-model [Accessed 18 Dec. 2019].

35BUSINESS ECONOMICS
Shibata, A., Shintani, M. and Tsuruga, T., 2019. Current account dynamics under information
rigidity and imperfect capital mobility. Journal of International Money and Finance, 92, pp.153-
176.
Smallbusiness.chron.com (2019). The Imposition of Taxes and Supply & Demand. [online]
Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/imposition-taxes-
supply-demand-10197.html [Accessed 18 Dec. 2019].
Sparknotes.com (2019). SparkNotes: Aggregate Demand: Shifts in the Aggregate Demand
Curve. [online] Sparknotes.com. Available at:
https://www.sparknotes.com/economics/macro/aggregatedemand/section3/ [Accessed 18 Dec.
2019].
Steinberg, D.A. and Nelson, S.C., 2019. The mass political economy of capital
controls. Comparative Political Studies, 52(11), pp.1575-1609.
Strauch, M., Pidun, U. and zu Knyphausen-Aufseß, D., 2019. Process matters–How strategic
decision-making process characteristics impact capital allocation efficiency. Long Range
Planning, 52(2), pp.202-220.
The Economic Times (2019). AD IA model: Latest News & Videos, Photos about AD IA model |
The Economic Times. [online] The Economic Times. Available at:
https://economictimes.indiatimes.com/topic/AD-IA-model [Accessed 18 Dec. 2019].
Web.stanford.edu (2019). [online] Web.stanford.edu. Available at:
https://web.stanford.edu/~jccast/JMP_Castillo.pdf [Accessed 18 Dec. 2019].

36BUSINESS ECONOMICS
World Economic Forum (2019). How to understand policy trilemmas. [online] World Economic
Forum. Available at: https://www.weforum.org/agenda/2015/04/how-to-understand-policy-
trilemmas/ [Accessed 18 Dec. 2019].
www.dictionary.com (2019). Definition of tight-money policy | Dictionary.com. [online]
www.dictionary.com. Available at: https://www.dictionary.com/browse/tight-money-policy
[Accessed 18 Dec. 2019].
Zeuthen, F., 2018. Problems of monopoly and economic warfare. Routledge.