Economics Assignment: Price Elasticity, Clean Air, Demand for Message, Cost Analysis

This economics assignment covers various topics such as price elasticity of demand, clean air as a public good, determinants of demand for message, and cost analysis. It includes detailed explanations, tables, and graphs to support the analysis. The assignment is relevant for students studying economics and related courses in colleges and universities.

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1....................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................2
Answer c.................................................................................................................................2
Answer 2....................................................................................................................................3
Answer a.................................................................................................................................3
Answer b................................................................................................................................3
Answer c.................................................................................................................................3
Answer 3....................................................................................................................................4
Answer a.................................................................................................................................4
Answer b................................................................................................................................4
Answer c.................................................................................................................................7
Answer 4....................................................................................................................................7
Answer d................................................................................................................................8
Answer e.................................................................................................................................8
Answer f.................................................................................................................................9
Answer 5....................................................................................................................................9
Answer a.................................................................................................................................9
Answer b..............................................................................................................................10
Answer c...............................................................................................................................10
Answer d..................................................................................................................................11
Answer 6..................................................................................................................................12
Answer a...............................................................................................................................12
Answer b..................................................................................................................................14
Answer c...................................................................................................................................15
Answer 7..................................................................................................................................15
Reference list............................................................................................................................17

2ECONOMICS ASSIGNMENT
Answer 1
Answer a
Price elasticity of demand measures the percentage change in quantity demanded in response
to certain percentage change in price (Fine 2016).
The price elasticity demand of beer in developed nations is -0.1. Therefore, a 10%
increase in price lead to a (10*0.1) = 1 percent decrease beer consumption. The proportionate
change in demand is less than the proportionate change in price. The tax therefore increases
consumer expenditure on beer in developed countries.
Answer b
The price elasticity demand of beer in developing countries is given as is -0.5.
Therefore, a 10% increase in price of beer following imposition of tax results in a (10*0.5) =
5 percent decrease beer consumption. The proportionate change in demand is still less than
the proportionate change in price. The tax therefore increases consumer expenditure on beer
in developed countries. However, the increase in consumption expenditure is less in
developing countries than that in developed nations.
Answer c
In developed nation people enjoy a higher average income as compared to people in
developing nations. Thus spending made on beer in developed nation constitutes a relatively
small proportion of their income. Also, people in developed nation have a greater preference
for beer (Baumol and Blinder 2015). These two factor make demand less sensitive to price in
advanced countries. For developing countries however, given the small income spending on
beer is constitutes a greater portion of income and thus has a higher responsiveness to price
change.

3ECONOMICS ASSIGNMENT
Answer 2
Answer a
Clean air is considered as a public good. The non-excludability and non-rivalry
characteristics of clean air a public good. It is not possible to exclude anyone from enjoying
benefits of clean air which make it non-excludable (McKenzie and Lee 2016). Further,
consumption of clear air by one individual does not reduce the quantity of clean air available
to any other individual. This makes clean air non-rival.
Answer b
Because of non-excludability and non-rivalry in clean air it regarded as public goods.
The clean air is available for free. The air gets polluted from emission generated by factories.
As clean air is available for free neither household nor factories incorporate the cost of
pollution (Friedman 2017). The pollution thus has a negative externality and leads to market
failure. In the presence of pollution, the marginal social cost exceeds the marginal private
cost leading to an overproduction of polluting activity. Government need to intervene in the
market to internalize the external cost of pollution and restore socially optimum output.
Answer c
The most common way to prevent air pollution is to impose a tax on polluting
activity. Carbon tax is one such tax that helps to reduce pollution by making people for the
social cost of pollution. Government can subsidize firm to adapt advanced production
techniques associated with low emission generation (Rader 2014). Alternatively, government
can limit the amount of pollutants that can be discharged by factories. This can be done by
distributing pollution permit among the firms restricting number of pollutants.

4ECONOMICS ASSIGNMENT
Answer 3
Answer a
Determinant of demand for message
Price
Price of a good is the main determinant of demand. As suggested by the law of
demand, an increase in the price of massages reduces demand for massages and vice versa
(Cowen and Tabarrok 2015).
Income
Income determines the affordability of buyers. If income increases, then people’s
demand foe massage service increases. With increasing income people can afford goods other
than necessary good and vice versa.
Taste and preferences
People’s preference for message service determines the demand for massages. When
people have higher preference for massage the demand more and more massage service.
Price of related goods
Demand for massages also depends on the price of its substitute or complementary
goods. If price of services substitutes to massage increases, then demand for massage
increases and vice versa. In case of substitute good an increases in price of the services
reduce the demand for message (Fine 2016).
Answer b
Price per
massage ($)
Consumer 1
demand
Consumer 2
demand
Consumer 3
demand
Market
demand

5ECONOMICS ASSIGNMENT
0 12 14 16 42
20 9 11 13 33
50 7 10 12 29
60 6 9 11 26
75 5 8 9 22
80 4 6 7 17
90 3 5 6 14
95 2 4 5 11
100 1 2 4 7
144 0 0 0 0
0 2 4 6 8 10 12 14
0
20
40
60
80
100
120
140
160
Consumer 1 demand
Quantity
Price
Figure 1: Demand curve for consumer 1
0 2 4 6 8 10 12 14 16
0
20
40
60
80
100
120
140
160
Consumer 2 demand
Consumer 2 demand
Quantity
Price

6ECONOMICS ASSIGNMENT
Figure 2: Demand curve for consumer 2
0 2 4 6 8 10 12 14 16 18
0
20
40
60
80
100
120
140
160
Consumer 3 demand
Consumer 3 demand
Quantity
Price
Figure 3: Demand curve for consumer 3
0 5 10 15 20 25 30 35 40 45
0
20
40
60
80
100
120
140
160
Market demand
Market demand
Quantity
Price
Figure 4: Market Demand curve

7ECONOMICS ASSIGNMENT
Answer c
If price increases from $50 to $90, market demand decreases from 29 to 14.
Therefore, slope of the demand curve
Slope= Δ P
ΔQ
¿ ( 90−50 )
( 14−29 )
¿ 40
−15
¿−2.67
The sign of the slope is negative. This implies the market demand curve slopes
downward from left to right.
Answer 4
Answer d
Quantity
produce
d
Fixe
d
cost
Variabl
e cost
Tota
l
cost
Averag
e cost
Averag
e
variable
costs
Margina
l cost
0 90 0 90
1 90 30 120 120.00 30.00 30
2 90 45 135 67.50 22.50 15
3 90 55 145 48.33 18.33 10
4 90 60 150 37.50 15.00 5
5 90 65 155 31.00 13.00 5
6 90 75 165 27.50 12.50 10
7 90 90 180 25.71 12.86 15
8 90 110 200 25.00 13.75 20
9 90 135 225 25.00 15.00 25
10 90 165 255 25.50 16.50 30

8ECONOMICS ASSIGNMENT
Answer e
0 2 4 6 8 10 12
0
5
10
15
20
25
30
35
Marginal cost
Quantity
Cost
Figure 6: Marginal cost curve
From the above table the marginal cost curve is obtained as a U shaped curve.
Marginal cost reduces up to 5 units of output. After reaching the minimum level the marginal
cost has started to increase. The marginal cost curve is U shaped because of the law of
variable proportion. At the initial stage of production with increase in variable input it gives
increasing return to scale (Nicholson and Snyder 2014). Because of specialization of variable
factor MC falls. After reaching the minimum MC rises because of change in scale of
operation and diminishing return from the same factor input.
Answer f

9ECONOMICS ASSIGNMENT
0 2 4 6 8 10 12
0
5
10
15
20
25
30
35
Relation between average variable cost and marginal cost
Marginal cost Average variable costs
Quantity
Average cost, marginal cost
Figure 6: Average Variable cost and marginal cost curve
At the initial stage of production, with increases in output both average variable cost
and marginal cost declines. Up to 4 units of output, marginal cost is less than average variable
cost. Beyond 4 units of output, marginal cost starts rising after reaching the minimum. The
average variable cost still declines. Average variable cost is greater than marginal cost until 6
units of output. After that marginal cost exceeds the average variable cost.
Answer 5
Answer a
Quantit
y
produc
ed
Pric
e
Fixe
d
cost
Variab
le cost
Tot
al
cost
Avera
ge
cost
Avera
ge
variabl
e costs
Margin
al cost
Total
Reven
ue
Margin
al
Reven
ue
Prof
it
0 $30 90 0 90 $0
1 $30 90 30 120 120.00 30.00 30 $30 $30 -$90
2 $30 90 45 135 67.50 22.50 15 $60 $30 -$75
3 $30 90 55 145 48.33 18.33 10 $90 $30 -$55
4 $30 90 60 150 37.50 15.00 5 $120 $30 -$30

10ECONOMICS ASSIGNMENT
5 $30 90 65 155 31.00 13.00 5 $150 $30 -$5
6 $30 90 75 165 27.50 12.50 10 $180 $30 $15
7 $30 90 90 180 25.71 12.86 15 $210 $30 $30
8 $30 90 110 200 25.00 13.75 20 $240 $30 $40
9 $30 90 135 225 25.00 15.00 25 $270 $30 $45
10 $30 90 165 255 25.50 16.50 30 $300 $30 $45
Answer b
The objective of a firm in the market is to maximize profit. In the competitive market,
the profit maximization condition requires price to be equal with the marginal cost (Rader
2014). The price in the market is given as $30. The marginal cost is equal to $30 with 10 unit
of output. The optimum level of production in the market hence should be 10.
Answer c
Quantit
y
produc
ed
Pric
e
Fixe
d
cost
Variab
le cost
Tot
al
cost
Avera
ge
cost
Avera
ge
variabl
e costs
Margin
al cost
Total
Reven
ue
Margin
al
Reven
ue
Prof
it
0 $20 90 0 90 $0
1 $20 90 30 120 120.00 30.00 30 $20 $20
-
$10
0
2 $20 90 45 135 67.50 22.50 15 $40 $20 -$95
3 $20 90 55 145 48.33 18.33 10 $60 $20 -$85
4 $20 90 60 150 37.50 15.00 5 $80 $20 -$70
5 $20 90 65 155 31.00 13.00 5 $100 $20 -$55
6 $20 90 75 165 27.50 12.50 10 $120 $20 -$45
7 $20 90 90 180 25.71 12.86 15 $140 $20 -$40
8 $20 90 110 200 25.00 13.75 20 $160 $20 -$40
9 $20 90 135 225 25.00 15.00 25 $180 $20 -$45
10 $20 90 165 255 25.50 16.50 30 $200 $20 -$55
When market price is $20, following short run equilibrium condition (P=MC) firm
now produces a lower output of 8 units. The average cost at this level of output is 25. The
price is less than average cost. The firm with this price output combination incurs a loss of

11ECONOMICS ASSIGNMENT
$40. The price however is greater than the average variable cost of $13.75. As the firm is
able to recover its variable cost it should continue its operation until price goes below the
minimum average variable cost of 12.50. The point where price goes below the minimum
average variable cost is called the shut-down point (Hutchinson et al. 2017).
Answer d
Quantit
y
produc
ed
Pric
e
Fixe
d
cost
Variab
le cost
Tot
al
cost
Avera
ge
cost
Avera
ge
variabl
e costs
Margin
al cost
Total
Reven
ue
Margin
al
Reven
ue
Prof
it
0 $10 90 0 90 $0
1 $10 90 30 120 120.00 30.00 30 $10 $10
-
$11
0
2 $10 90 45 135 67.50 22.50 15 $20 $10
-
$11
5
3 $10 90 55 145 48.33 18.33 10 $30 $10
-
$11
5
4 $10 90 60 150 37.50 15.00 5 $40 $10
-
$11
0
5 $10 90 65 155 31.00 13.00 5 $50 $10
-
$10
5
6 $10 90 75 165 27.50 12.50 10 $60 $10
-
$10
5
7 $10 90 90 180 25.71 12.86 15 $70 $10
-
$11
0
8 $10 90 110 200 25.00 13.75 20 $80 $10
-
$12
0
9 $10 90 135 225 25.00 15.00 25 $90 $10
-
$13
5
10 $10 90 165 255 25.50 16.50 30 $100 $10
-
$15
5

12ECONOMICS ASSIGNMENT
If market price changes to $10, then price is both below the total average cost and
minimum average cost of $12.50. As price is less than the minimum average variable cost
therefore the loss making firm in the short run would no longer continue its operation and
shut down operation.
Answer 6
Answer a
i)Chiropractor service is a substitute of physiotherapy service. Demand of a good is
sensitive to the changes in price of related goods. In case of substitute good, a fall in price of
one good increases the demand for the concerned good reducing demand for it substitute
(Baumol and Blinder 2015). A fall in the price of chiropractor service thus causes a rise in
demand for Chiropractor service. As demand for Chiropractor service rises, the demand for
physiotherapy service falls. The decreased demand causes an increases a decline in the price
and equilibrium quantity of physiotherapy service. The impact of a decreases in demand on
the physiotherapy market is shown below.
Figure 7: Effect of a fall in price of Chiropractor service

13ECONOMICS ASSIGNMENT
(Source: as created by Author)
ii) An increase in income increases purchasing power. For a normal good, demand for
a good increase with increase in income (Rader 2014). An increase in income there lead to
an increase in physiotherapy services. This causes the demand curve for physiotherapy
services to shift outward causing an increase in equilibrium price and quantity.
Figure 2: Effect of an increases in income in physiotherapy market
(Source: as created by Author)
Answer b
Demand function
QD=28− 1
2 P
Supply function
Qs =P−20

14ECONOMICS ASSIGNMENT
At equilibrium,
QD=Qs
¿ , 28− 1
2 P=P−20
¿ , P+1
2 P=28+20
¿ , 3
2 P=48
¿ , P= 48 × 2
3
¿ , P=32
Q=P−20
¿ 32−20
¿ 12
Equilibrium price = $32
Equilibrium quantity = 12
Answer c
If government sets a price floor of $50, then
Quantity demanded is
QD=28− 1
2 P
¿ 28−1
2 × 50

15ECONOMICS ASSIGNMENT
¿ 28−25
¿ 3
Quantity supplied is
Qs =P−20
¿ 50−20
¿ 30
Answer 7
The objective of the health department to incentivize medical practitioner to practice
in small town. The health department aims to secure the quality of health in small towns. In
city, practitioners generally have greater scope to build their careers and earn a higher
income. For this reason, the new practitioners are always eager to settle in large city. The
towns having a low density of population thus suffers from lack of proper medical care. By
providing monetary incentive the department thus wants to attract practitioners in town to
improve health status of population living there.
In order to decide which option to choose, a cost benefit analysis need to be done
(Nicholson and Snyder 2014). The benefit to move to the country is additional 20% gain in
annual salary. The cost of such decision might be forgoing comfortable city life or a brighter
future opportunity. If the salary gain outweighs cost of moving to the country, then decision
should be taken in favor of moving to country rather than practicing in the city.

16ECONOMICS ASSIGNMENT
Reference list
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave
Macmillan.
Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University
Press.
Hutchinson, E., Nicholson, M., Lukenchuk, B. and Taylor, T., 2017. Principles of
Microeconomics. University of Victoria.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs. Cambridge University
Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Rader, T., 2014. Theory of microeconomics. Academic Press.