Price Elasticity and Monopoly Market Features

The provided assignment is a detailed explanation of various economic concepts related to price elasticity and monopoly/oligopoly markets. It starts by discussing the factors that affect the price elasticity of demand, including income, substitutes, product nature, and price levels. The assignment then delves into the characteristics of monopoly markets, highlighting the unique features such as single sellers and differentiated products. Additionally, it explores the concept of third-degree price discrimination, which occurs when a monopolist divides its market into separate segments based on elasticity of demand and charges different prices accordingly. Furthermore, the assignment explains the phenomenon of kinked demand curves in oligopoly markets, where firms engage in non-price competitions to avoid price wars. The document is essential for students looking for detailed explanations and examples of these economic concepts.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

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Table of Contents
MCQ:...............................................................................................................................................2
Answer 1:.........................................................................................................................................6
Answer 2:.........................................................................................................................................7
Answer 3:.........................................................................................................................................7
Answer 4:.........................................................................................................................................9
Answer 5:.......................................................................................................................................10
References......................................................................................................................................12

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MCQ:
1 For a given question to be considered an economic question, it would need to involve:
Ans: D. limited resources and making a choice.
2 If Jane works for six hours she can rent 12 apartments, and if she works for seven hours
she can rent 15 apartments. The marginal benefit of the seventh hour of Jane's work
equals:
Ans: D. 3 apartments
3 Jay has estimated that the additional benefit of writing 50 more lines of computer
programming code is $20 and the additional cost is $10. He should:
Ans: C. write the code because it would be a rational choice but it is not necessarily an
optimal quantity.
4 What is the opportunity cost of living in a house that you already own?
Ans: C. The rent you could receive if you rented the house out to someone else.
5 Which of the following statement is true?
Ans: C. Both A and B.
6 A New Zealand worker can produce three tonnes of barley in a year. That worker can also
produce three bales of wool in a year. An Australian worker can produce two tonnes of
barley in a year or one bale of wool in a year. With trade between the countries:
Ans: C. Australia will export barley, New Zealand will export wool.

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7 The argument that cheap foreign labour might take the jobs away from high-wage
economies is fallacious because it does not consider the
Ans: A. cost–benefit principle.
8 Which of the following statements is not true about specialisation?
Ans: D. The variety of tasks associated with a particular job grows over time.
9 Suppose there is a shortage of bananas in the fruit shops. What will restore the
equilibrium?
Ans: B. An increase in the price of bananas and a decrease in quantity demanded.
10 Consider the market for a normal good Y in which the law of demand holds. The price of a
complement falls at the same time as consumer income rises. In this case:
Ans: D. None of the given answers.
11 Andrew the auctioneer has one block of land of a fixed size that he can sell. Andrew
spends $5000 for advertising and says, ‘We have to advertise a lot for the auction in the
hope of increasing the number of people, as price will be determined by demand only.'
Andrew's statement is:
Ans: B. true because the supply is perfectly inelastic.

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12 For two goods, X and Y, to be classified as ___________, it must be the case that when the
price of X rises, the demand for Y increases; and to be classified as ___________, it must
be the case that when the price of X rises, the demand for Y decreases.
Ans: D. substitutes; complements
13 Consider the following diagram:
Ans: B. increase in the wages of labourers.
14 Compared to the rest of the year, the prices of airline tickets to Fiji are 60 per cent higher
from December to February. This year the Fijian economy is experiencing a substantial
increase in the price of fuel. In the period from December to January, there must be:
Ans: C.an increase in price and an ambiguous change in quantity traded for airlines tickets.
15 The price of beer increases from $100 to $127 and total revenue rises. In this case the price
elasticity of demand is
Ans: B. inelastic.

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16 Petrol prices have risen a number of times in recent months in Australia due to a shift on
the supply side of the market. This will lead to a:
Ans: B. large increase in consumer expenditure, the lower the elasticity of demand for
petrol.
17 A difference between a firm in a competitive industry and a firm that has monopolised its
industry is that:
Ans: C. a competitive firm always faces a constant marginal revenue, whereas a monopoly
faces a downward-sloping marginal revenue curve.
18 Consider a monopolist facing a demand curve given by q = 30 – 0.5P, where P is the market
price and q is the quantity sold. The monopolist's marginal costs are MC = 2q per unit; there are
no other costs. What would be the output if the industry were competitive?
Ans: D. 40
19 Which of the following circumstances does not involve game theory?
Ans: D Firm behaviour in a perfectly competitive market.
20 If firms are exiting a perfectly competitive industry, this suggests:
Ans: C. normal profits.

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Answer 1:
Due to the improvement in the technological aspects of construction, the production
efficiency of housing sector is expected to increase, which also includes the rental
accommodations. This in turn increases the supply of the rental accommodations, the effects of
which can be seen with the help of the following figure:
Figure 1: Increase in supply due to technological innovations
(Source: As created in author)
As can be seen from the above figure, due to the improvement in building technologies,
the production and cost efficiency of the rental accommodation increases, which increases the

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supply of the same. With the demand for the same remaining the same, the increased supply
decreases the rent of the same.
Answer 2:
The price elasticity of demand is an economic indicator which shows the degree of
responsiveness of the demand for a good or service to the change in the price level of the same,
assuming that all the factors remain the same.
The price elasticity of demand of a good or service depends on several factors, the
primary ones being as follows:
a) Income- High income indicates towards less price elasticity as compared to low income. This
is because with more income, people become indifferent to small price changes.
b) Substitutes- Presence of more substitutes increases the price elasticity of a commodity as with
a small price-change people shift to other options.
c) Nature- The nature of a commodity also effects the elasticity. Generally, luxury goods have
high elasticity while necessary goods have low elasticity of demand.
d) Price levels- The price levels of commodities also affect the elasticity. Commodities with high
price levels in general have higher price elasticity and vice versa.
Answer 3:
Two unique characteristics of monopoly are as follows:
a) In monopoly market, there remain many buyers but only a single seller.

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b) The product sold by the monopolist does not have any close substitute.
The profit maximization of a monopolist can be shown with the help of the following figure:
Figure 2: Profit Maximizing Condition for a Monopolist
(Source: As created by the author)
As can be seen from the above figure, a monopolist maximizes its profit at the point
where the Marginal Cost curve cuts the average total curve at its minimum point and also where
the marginal cost of production of one additional unit of the commodity is equal to the marginal
revenue obtained from that additional unit of commodity. Thus, profit is maximized for a
monopolist at the point where MC=MR (Rios, McConnell and Brue 2013).

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Answer 4:
Third degree price discrimination occurs when a monopolist is able to divide its entire
market into different markets based on their elasticity of demand and can charge different prices
accordingly. The conditions required for third degree price discrimination are as follows:
a) Monopoly- There should be monopoly in the market, in the supply side.
b) No Arbitrage- The markets need to be geographically separate and distant and there needs to
be absence of the possibility of arbitrage. The buyers of one market cannot buy from any other
markets.
c) Different Elasticity- The elasticity of demand has to be different in the different sub-markets.
The third degree price discrimination can be understood with the help of the following figure:
Figure 3: Third Degree Price Discrimination
(Source: Cowan 2012)
As can be seen from the above figure, the price elasticity of demand is less in the first
market while the same is more in the second market, which allows the monopolist to charge

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more price in the former and lesser price in the second market, thereby showing the presence of
third degree price discrimination for the concerned monopolist.
Answer 5:
The two unique features of oligopoly market are that:
a) There exit many buyers but there exist only a few sellers.
b) The product sold by each of the sellers are differentiated in some aspects.
There exists the phenomenon of Kinked Demand Curve in the oligopoly market, which can be
shown as follows:
Figure 4: Kinked demand curve in Oligopoly
(Source: As created by the author)

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The changes in the prices in order to attract customers, in an oligopoly market, often
leads to price war, which affects the oligopolistic firms negatively, which can be shown with the
help of the kinked demand curve model in oligopoly. The firms, thus, often engages in non-price
competitions in the oligopolistic market (Rios, McConnell and Brue 2013).

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References
Cowan, S., 2012. Third‐Degree Price Discrimination and Consumer Surplus. The Journal of
Industrial Economics, 60(2), pp.333-345.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.