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

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.