Demand and Supply Assignment | Microeconomics

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer 3..........................................................................................................................................2
Answer 4..........................................................................................................................................3
Answer 5..........................................................................................................................................4
Answer 6..........................................................................................................................................5
Answer 7..........................................................................................................................................6
Answer 8..........................................................................................................................................7
Answer 9..........................................................................................................................................8
Answer 10........................................................................................................................................9
Answer 11......................................................................................................................................10
Answer 12......................................................................................................................................11
Reference.......................................................................................................................................13

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Answer 1
The events that causes to increase the demand for coffee are:
(c) “A decrease in price of coffee” would increase the demand for coffee because fall in price
would make the product more affordable and thus consumers would be able to consume more by
spending same amount of money.
(d) The demand for coffee would increase due to “the Surgeon General’s announcement that
coffee lowers the risk of heart disease” because consumers would increase their consumption of
coffee to improve their heart condition and lower heart disease risk.
Answer 2
My friend is assuming that with increase in distance travelled the amount of flight fare
price increases. It means that distance travelled and price are directly proportional (Azevedo and
Leshno 2016). However, the case is different since price is related to demand and supply. In this
case, the supply is fixed as the number of flights are limited but demand can vary depending
factors like tourism season (Bazzi 2017). The higher price of flight from New York to Chicago
than Orlando from New York is due to the higher demand for the flight ticket from New York to
Chicago.
Answer 3
Income elasticity of doughnut is given by
Income elasticity of doughnut = Percentage change∈doughnut consumption
Percentage change∈income
¿ , Income elasticity of doughnut = 4
2.5

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¿ , Income elasticity of doughnut =1.6
The income elasticity of demand is found to be 1.6 which is greater than 1. Therefore, as
per theory of elasticity it can be said that doughnut is a luxury good.
Answer 4
(A) Market supply for solar panels is given as
QS =35 P−5000
Market demand for solar panels is given as
QD=45000−15 P
At equilibrium,
QS =QD
¿ , 35 P−5000=45000−15 P
¿ , 50 P=50000
¿ , P=1000
From the above calculation, equilibrium price is found to be £1000.
Therefore, equilibrium quantity is
QD=45000−15 P
¿ , QD =45000−(15× 1000)
¿ , QD =45000−15000

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¿ , QD =30000
At equilibrium, number of solar panels sold in the market is 30000
(B) After subsidy of £200 by the government the price paid by the consumers is
Price paid by consumers after subsidy=1000−200
¿ , Price paid by consumers after subsidy=£ 800
However, the price received by the producers after subsidy is £1000 because and the subsidy is
given to the consumers.
(C) The equilibrium quantity is 30000 and £200 per unit is given as subsidy by the government.
Therefore, the cost borne by the government for the subsidy program is
Cost of subsidy program=200 × 30000
¿ , Cost of subsidy program=£ 6000000
Answer 5
The maximum price a consumer is willing to pay for a product is said to be the
consumer’s willingness to pay. It can be calculated by the sum of actual price and consumer
surplus.
Georg e' s willingness ¿ pay= Actual price+Consumer surplus
¿ , Georg e' s willingness ¿ pay=150+250
¿ , Georg e' s willingness ¿ pay=£ 400

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Q
D
Q1DQ1
S
QS
E
PT
D
0
Consumer
Surplus
S0
PW
D
D
S
D
Quantity
Price
Tax Revenue
Deadweight Loss
Producer Surplus
Answer 6
(a) The creation of state lotteries generates a substitute product of the number games (Carroll et
al. 2018). Thus, if the price of lottery tickets is lower than the price of participating in number
games then the demand for number games will reduce and vice versa.
(b) The creation of state lotteries are secure than the mob-run number games and thus the number
of people playing the game will reduce and in addition to that, the price of state lottery tickets
would impact the mob-run number game inversely.
(c) The creation of state lottery would remove the monopoly power of the number type games
and thus the price of the number games would fall.
(d) It is given that the nominal price is fixed for the tickets of the number games and thus to
lower the effective price of the tickets in order to compete with the state lotteries the number
game firms would offer free tickets on purchase of a certain amount of ticket or increase the
value of prize money.
Answer 7
Figure 1: Effect of Tariff
Source: (Created by the Author)
In figure 1, PW is
world price and PT is
price after tariff of
the product. At price PW, the quantity demanded by

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domestic consumers is given as QD, however, the amount supplied by the domestic producers is
QS (Zeuthen 2018). Therefore, the rest amount demanded domestically is imported and the
amount is given by difference between QD and QS. At world price, total surplus is given by blue,
read, orange triangles, green rectangle and yellow quadrilateral. Out of total surplus, the
domestic producers’ portion of surplus is shown as blue triangle whereas the rest portion belongs
to the consumers when the price is at PW. The surplus portion of all changes after imposition of
tariff by the government (Lei and Popescu 2016). Imposition of tariff has increased the price of
the product to PT and owing to that the domestic supply increased from QS to Q1S and the
domestic demand decreased to Q1D from QD. Therefore, imposition of tariff has decreased the
amount of import, which is given by the difference between Q1S and Q1D. The producer surplus
after imposition of tariff has increased, which is given by blue and yellow triangles (Javorcik and
Narciso 2017). On the hand, due to the price rise after tariff the surplus of the consumers
decreased. The consumer surplus after tariff is shown as red triangle in the figure. Tariff is tax
imposed by the government and thus the tax is collected from tariff is the revenue for the
government. Therefore, the revenue is shown as green rectangle in the figure. The tariff has thus
acted in favour of producers and the government. The tariff has worse off effect on the
consumers since the surplus has decreased for them. Considering the value of total surplus, it has
been observed that due to imposition of tariff the amount of the total surplus has decreased as
there is a loss of social welfare in the form of deadweight loss shown as orange triangles in the
diagram (Sweetnam et al. 2019). Therefore, deadweight loss is an economic loss and it was not
present when the price of the good was PW in the home country. It can be thus inferred that the
tariff has adverse effect on the economy of the nation if the accounting of total surplus is

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I
G
H
Subsidy P
QS
PS
Q*
P*
S
D
Quantity
Price
B
C
F
A
E
Deadweight loss
considered. Hence, to wrap up the discussion it can be said that tariff improved the condition of
producers and the government but affected consumers and the nation adversely.
Answer 8
The statement in the question that “the person who pays a tax by law not necessarily the
same as the person who bears the larger burden of tax” can be explained through the theory of
demand and supply (Hiller and Savage 2019). Suppose, the government imposes tax on a product
and the tax is paid by the producers. Because of the tax, the cost of the producers increases. It is
known from economic theory that producers in order to reduce cost cut number of employees,
pays less wage to new employees and give less increment to existing employees. Therefore, the
burden of tax shifts to the employees (Anderson and Neary 2016). The tax payer and bearer of
burden of tax is not the same and always the person who bears the burden is more affected.
Hence, tax paid by a person is not same as tax burden borne by some other person.
Answer 9
Figure 2: Deadweight loss due to subsidy

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Source: (Created by the Author)
The government of country gives subsidy to consumers of a product in order to
encourage consumption of that particular product. Subsidy decreases the effective price of a
product to the consumers. In figure 2, the free market the equilibrium price of the product is
given as P* and the corresponding equilibrium quantity is given as Q* (Dwenger, Steiner and
Rattenhuber 2019). The government has provided subsidy on the product and because of that, the
price of the effective price of the product to the consumers decreased to PS. However, in this case
the producers are not worse off as they are getting the same price as they were receiving before,
which is the price P* (Akhmadeev et al. 2016). Due to this fall in price, the demand for the
product increases to QS and as a result, the price received by the producers is P. The increased
amount of price is again subsidized by the government in order to keep the price of the
consumers to P*. Therefore, to fund the amount of subsidy the cost borne by the government is
given by B+C+F+G+H+I. However, if the total surplus is considered which is given by the sum
of producer and consumer surplus, then it can be observed that the surplus gain by the consumer
and producer is sum of A+B+C+E+F+G+I. Before subsidy the total surplus was given by
A+B+C+E. Therefore, surplus gain due to subsidy is given by B+C+F+G+I. Hence, the block
that represent the subsidy cost of the government is larger than the block that represents the gain
in surplus due to subsidy by the area shown as H in the figure. It can be thus inferred that the
impact of subsidy is lower than intended and caused loss in fund in the process and that lost part
is H, which is the deadweight loss caused due to subsidy. Therefore, it is found that subsidy
generates deadweight loss.

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Answer 10
Due to increase in license fee per year of the street vendor for operating in the markets
increases, then (d) the street vendor’s total variable cost curve will rotate upward and (b) the
street vendor’s marginal cost curve will shift up along with its average variable cost curve (Chen,
Dimitrov and Pun 2019). This occurs because license fee per year for operating in the market is
variable cost since if the street vendor do not operate then it do not have to bear the cost and thus
the cost of license fee is variable in nature. Therefore, this is the reason the average variable cost
curve move upward. On the other hand, unit cost of producing also increases and thus marginal
cost curve increases and as a result, the marginal cost moved upward (Khalid and Salman 2019).
The cost of license is an annual cost which the street vendor did not have to bear earlier and thus
eh increase has cause total variable cost curve to rotate upward.
Answer 11
(a) Revenue of Sally when she sells 5 shells at £7 is
Revenue=7 ×5
¿ , Revenue=£ 35
(b) Revenue of Sally when she sells 6 shells at £6 is
Revenue=6 ×6
¿ , Revenue=£ 36
(c) Marginal revenue received by Sally by selling shells at £6 is
Marginal Revenue= 36−35
6−5

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¿ , Marginal Revenue=£ 1
(d) The marginal revenue from selling the 6th unit of shell is so low because it reduces the price
of the shells per unit and thus the revenue generated per unit lower by £1 (Gleave and Feess
2016). Therefore, owing to this the revenue generated from selling 6 units is just £1 higher than
revenue generated from selling of 5 units if shells.
Answer 12
(a)
Table1
Source: (Created by the Author)
(b) Nancy should produce 3 units if beeswax in order to maximize profit as from table 1 it can be
observed that at 3 units the marginal revenue equals marginal cost, which is the profit
maximizing condition.
(c) At the profit maximizing level of output, marginal revenue is equal to marginal cost.
(d)

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Table 2
Source: (Created by the Author)
The fall in fixed cost to £12, reduces the total cost for Nancy but not marginal cost. Thus,
the profit maximizing values of marginal revenue and marginal cost remains the same.
Therefore, the Nancy would not alter her production decision.
(e)
Table 3
Source: (Created by the Author)
The sudden increase in marginal cost by £8 at every level of output has caused the
variable cost and total cost to increase (Winter et al. 2019). Owing to this, at the given price
Nancy makes loss if she produces the previous level of profit maximizing output. However, it
can be observed from table 2 that due to marginal cost increase Nancy can just breakeven by
producing 1 unit of beeswax (Ahn and McQuoid 2017). Therefore, if Nancy decides to stay in
the business then she would produce 1 unit of beeswax.

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Reference
Ahn, J. and McQuoid, A.F., 2017. Capacity constrained exporters: Identifying increasing
marginal cost. Economic Inquiry, 55(3), pp.1175-1191.
Akhmadeev, R.G., Kosov, M.E., Bykanova, O.A., Ekimova, K.V., Frumina, S.V. and
Philippova, N.V., 2016. Impact of tax burden on the country‟ s investments. Education, 54(3.5),
pp.1-6.
Anderson, J.E. and Neary, J.P., 2016. Sufficient statistics for tariff reform when revenue
matters. Journal of International Economics, 98, pp.150-159.
Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), pp.1235-1268.
Bazzi, S., 2017. Wealth heterogeneity and the income elasticity of migration. American
Economic Journal: Applied Economics, 9(2), pp.219-55.
Carroll, A.N., Black, S.M., Sun, Y.H., Burke, W.J., DiNovi, C.J., Phillips, D., Macko, J.A. and
Smith, R., Altria Client Services LLC, 2018. Methods and machines for pouching smokeless
tobacco and tobacco substitute products. U.S. Patent Application 16/042,221.

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Chen, J.Y., Dimitrov, S. and Pun, H., 2019. The impact of government subsidy on supply
Chains’ sustainability innovation. Omega, 86, pp.42-58.
Dwenger, N., Steiner, V. and Rattenhuber, P., 2019. Sharing the burden? Empirical evidence on
corporate tax incidence. German Economic Review, 20(4), pp.e107-e140.
Gleave, S. and Feess, E., 2016. Fixed fee licensing for cost-reducing technologies: Should
innovators reveal their private information?. Review of Managerial Science, 10(4), pp.781-799.
Hiller, R.S. and Savage, S., 2019. The Effects of Tariffs on United States Tablet Computer Prices
and Welfare. Available at SSRN 3407621.
Javorcik, B.S. and Narciso, G., 2017. WTO accession and tariff evasion. Journal of Development
Economics, 125, pp.59-71.
Khalid, S.A. and Salman, V., 2019. Welfare impact of electricity subsidy reforms in Pakistan: A
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Lei, M. and Popescu, C., Oracle International Corp, 2016. System and method for determining a
combined effective price discount in tier pricing. U.S. Patent Application 14/670,798.
Sweetnam, T., Fell, M., Oikonomou, E. and Oreszczyn, T., 2019. Domestic demand-side
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Zeuthen, F., 2018. Problems of monopoly and economic warfare. Routledge.