Managerial Economics: Analyzing Equilibrium, Competition, and Policy

This assignment delves into key concepts of managerial economics, analyzing market equilibrium, the effects of government policies like price floors, and different market structures. It examines scenarios involving supply and demand shifts, such as the bottled water market in summer and the orange juice market affected by weather and health studies. The assignment also explores the characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly, classifying various industries accordingly. Furthermore, it evaluates the impact of negative externalities like air pollution and discusses the principles of taxation, including benefits-received and ability-to-pay. The solutions provided offer detailed explanations and justifications for each answer, providing a comprehensive understanding of the economic principles at play. Desklib provides access to similar solved assignments and study tools for students.

Managerial economics

Contents
Contents...........................................................................................................................................2
Question 1........................................................................................................................................4
Assume that both the supply of bottled water and the demand for bottled water rise during the
summer but that supply increases more rapidly than demand. What can you conclude about
changes in equilibrium price and equilibrium quantity?.............................................................4
Question 2........................................................................................................................................5
Will the equilibrium price of orange juice increase or decrease in each of the following
situations?....................................................................................................................................5
A) medical study reporting that orange juice reduces cancer is released at the same time that a
freak storm destroys half of the orange crop in Florida...............................................................5
B) The prices of all beverages except orange juice fall in half while unexpectedly perfect
weather in Florida results in an orange crop that is 20 percent larger than normal.....................5
Question 3........................................................................................................................................6
Suppose that you are the economic advisor to a local government that has to deal with a
politically embarrassing surplus that was caused by a price floor that the government recently
imposed. Your first suggestion is to get rid of the price floor, but the politicians don’t want to
do that. Instead, they present you with the following list of options that they hope will get rid
of the surplus while keeping the price floor. Identify each one as either could work or can’t
work.............................................................................................................................................6
A) Restricting supply...................................................................................................................6
B) Decreasing demand.................................................................................................................6
C) Purchasing the surplus at the floor price.................................................................................6
Question 4........................................................................................................................................7
Use the table below to answer the questions that follow:............................................................7
Q1. If this table reflects the supply of and demand for tickets to a particular World Cup soccer
game, what is the stadium capacity?............................................................................................7

Q2. If the present ticket price is $45, would we expect to see a secondary market for tickets?
Explain why or why not. Would the price of a ticket in the secondary market be higher than,
the same as, or lower than the price in the primary market?.......................................................7
Q3. Suppose for some other World Cup game that the quantities of tickets demanded are
20,000 lower at each ticket price than shown in the table. If the ticket price remains $45,
would the event be a sell-out? Explain why or why not?............................................................8
Question 5........................................................................................................................................8
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic
competition, and oligopoly. Into which of these market classifications does each of the
following most accurately fit?.....................................................................................................8
(a) A supermarket in your hometown;.........................................................................................8
(b) The steel industry;..................................................................................................................8
(c) A Kansas wheat farm;............................................................................................................8
(d) The commercial bank in which you have an account;...........................................................8
(e) The automobile industry. In each case, justify your classification........................................8
Question 6......................................................................................................................................10
Critically evaluate and explain:.................................................................................................10
a. In monopolistically competitive industries, economic profits are competed away in the long
run. Hence, there is no valid reason to criticize these industries’ performance and efficiency.10
b. In the long run, monopolistic competition leads to a monopolistic price but not to
monopolistic profits...................................................................................................................10
Question 7......................................................................................................................................11
What information does a government need if it wants to attempt to reduce a widespread
negative externality like air pollution? Who, typically, is actually in possession of that
information? How do markets in tradeable emissions permits solve the asymmetric
information problem affecting pollution abatement efforts?.....................................................11
Question 8......................................................................................................................................12
Distinguish between the benefits-received and the ability-to-pay principles of taxation. Which
philosophy is more evident in our present tax structure? Justify your answer. To which
principle of taxation do you subscribe? Why?..........................................................................12
REFERENCES..............................................................................................................................14

Question 1
Assume that both the supply of bottled water and the demand for bottled water rise
during the summer but that supply increases more rapidly than demand. What can you
conclude about changes in equilibrium price and equilibrium quantity?
Answer 1
The equilibrium quantity would increase while the equilibrium price would decrease.
When supply and demand simultaneously grow, the equilibrium quantity rises as well. Since
the rise in supply is higher than the rise in demand, the equilibrium price lowers (see figure
below).

Question 2
Will the equilibrium price of orange juice increase or decrease in each of the following
situations?
A) medical study reporting that orange juice reduces cancer is released at the
same time that a freak storm destroys half of the orange crop in Florida.
B) The prices of all beverages except orange juice fall in half while unexpectedly
perfect weather in Florida results in an orange crop that is 20 percent larger than normal.
Answer 2
(a) Significantly rise: The scientific investigation claiming that orange juice could help
prevent cancer would lead the orange juice demand curve to shift to the right. The supply
curve for orange juice would move to the left as a result of the storms which destroyed half
of Florida's citrus harvest. The cost of orange juice would rise as a result of these two
changes happening at the identical moment. Thus it can be said that after a detailed study
and evaluation of all the aspects it has seen that it will rise in the industry (Aday and Aday,
2020) .
(b) Reduced: Demand for orange juice would result if the cost of other drinks is cut in half,
because most individuals would drink lesser orange juice. As a result, the orange juice
demand curve would shift to the left. At the very same moment, the ideal climatic conditions
which resulted in a big harvest of citrus in Florida would lower orange prices. Since oranges
have been the only component in orange juice, the cost of making it will decrease, boosting
the revenues of orange juice producers and pushing them to create more of it. As a result,
the orange juice supply curve would shift to the right. The cost would fall as a combination
of these two shifts happening at the very same instant. It has been concluded after a long,
detailed, and precise research and thus it can be said that it will decrease as per the
following situation (Adler-Nissen, Galpin and Rosamond, 2017) .

Question 3
Suppose that you are the economic advisor to a local government that has to deal with a
politically embarrassing surplus that was caused by a price floor that the government
recently imposed. Your first suggestion is to get rid of the price floor, but the politicians
don’t want to do that. Instead, they present you with the following list of options that they
hope will get rid of the surplus while keeping the price floor. Identify each one as either
could work or can’t work.
A) Restricting supply
B) Decreasing demand
C) Purchasing the surplus at the floor price.
Answer 3
a. Curtailing supply: The economy's surplus occurred as a result of an overflowing supply,
in which the supply exceeds the rate of interest. Whenever the government restricts the
stock of goods that seem to be comparable to extra on the search, the surplus on the
watchful might be reduced. As a result, the selection of limiting stocks may be able to
eliminate marketplace surplus. It is a very useful aspect as it is used when the demand for
a product or commodity is much more higher than it is expected and thus the supply for
the very same product does not match up with the increased demand and thus it falls way
short as per the expectation and thus this method is used at such a situation. Though there
can be other things which can be responsible for the supply aspect but the demand is the
first and the foremost thing as demand and supply are inter related and thus it is very
obvious that one aspect affect and impacts the other one (Aslan, Destek and Okumus,
2018).
b. Declining demand: The economy's surplus occurred as a result of an excessive supply,
in which supply exceeds interest. When the government lowers the interest rate, it
promotes an increase in the surplus supply, which in turn encourages an increase in the
surplus on the market. The option of decreasing interest will no longer be effective in
reducing surplus. It is one of the method which is used very often due o increased supply

and thus the administration takes appropriate steps sop that it can tackle the issue in an
impactful manner which is very crucial for the nation and its substantial position.
c. Pricing ceiling: The pricing floor refers to the lowest price that a merchant can indeed be
compensated for his inventory. This is compelled by the government to prevent the
dropping propensity of worth; it is also known as sustaining price. If an item's price floor
is higher than the equilibrium level, it will have a lower popularity. The seller, on the
other hand, may be able to offer the goods for more than the marketplace price. This
would persuade the shopkeeper to increase his stock. The price floor inevitably causes
excess to be on the lookout. It is one of the beneficial method as it is used as and when
needed the most and has proved very successful and thus contributed a lot in creating and
maintaining the structure of the economy intact so that it can function in an appropriate
and structured manner which is very critical as well as crucial for each and every nation
whether it is developed of still developing (Banzhaf, Ma and Timmins, 2019).
Question 4
Use the table below to answer the questions that follow:
Q1. If this table reflects the supply of and demand for tickets to a particular World Cup soccer
game, what is the stadium capacity?
Ans. From the above it can be stated that the capacity of the stadium is 60,000 (vertical supply
curve = fixed quantity supplied).
Q2. If the present ticket price is $45, would we expect to see a secondary market for tickets?
Explain why or why not. Would the price of a ticket in the secondary market be higher
than, the same as, or lower than the price in the primary market?
Ans. Yes, also because cost is set lower than the equilibrium price, there will be a subsequent
marketplace for tickets. Due to the obvious scarcity, the subsequent marketplace (ticket scalping)
cost would have been much higher than the initial cost of $45 since purchasers are ready to
spend extra (Benjamin, 2018).

Q3. Suppose for some other World Cup game that the quantities of tickets demanded are 20,000
lower at each ticket price than shown in the table. If the ticket price remains $45, would the
event be a sell-out? Explain why or why not?
Quantity demanded,
thousands
Price Quantity supplied, thousands
80 $25 60
75 $35 60
70 $45 60
65 $55 60
60 $65 60
55 $75 60
50 $85 60
Ans. No, the event just wouldn't sold out since the amount sought is only 50,000 (vertical supply
curve moves right, reducing the equilibrium price) and the ticket cost is significantly more than
the equilibrium price of $25, resulting in an excess. There will be no such thing as a
supplementary marketplace (Bathelt and Glückler, 2018).
Question 5
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic
competition, and oligopoly. Into which of these market classifications does each of the
following most accurately fit?
(a) A supermarket in your hometown;
(b) The steel industry;
(c) A Kansas wheat farm;
(d) The commercial bank in which you have an account;
(e) The automobile industry. In each case, justify your classification.
Answer 5
There are a number of different aspects and the firms which are operating in the market
works as per these situation and work according to the norms and conditions that are set up at the
starting and it is very important as well as essential to follow those structures so that the firms

can operate in the market in a smooth manner without any interruptions in between which can
prove beneficial in the increased profitability of the company in the long run. Pure
competitiveness is characterised by a huge quantity of enterprises, standardised goods, priced
takers with no cost regulation, and free access and departure into the marketplace. A pure
monopolies has the following features: it is a sole firm, that there were no near alternatives, they
are pricing creators who set their respective pricing, and there is no entrance into the
marketplace. Massive groups of vendors, distinct items (typically pushed by intensive
marketing), and simple access and departure from the industry are all features of monopolistic
competitiveness. An oligopoly is characterised by a marketplace arrangement controlled by a
few major manufacturers of homogeneous or diversified goods (Buckle and Thompson, 2020).
(a) A supermarket in your hometown: A grocery in the neighbourhood will be an oligopoly
since there could be very little retailers in the area, and entering the marketplace to
participate would've been limited due to competitive pressures.
(b) The steel industry: The steel sector is an oligopoly because it contains a small number
of firms that produce standardised commodities, the scale of the marketplace makes
entry hard, and there is really quite minimal pricing competitiveness. Since there is a
huge investment outlay it comes in oligopoly and also everyone could not afford to bear
such high risks in long term with such a huge capital invested in the market which is
highly competitive and dynamic in nature (Cashin, Mohaddes and Raissi, 2016).
(c) A Kansas wheat farm: It is a pure competition as there are many comparable fields,
uniform output, no pricing regulation, tough to join the industry due to the amount of
property required to grow and satisfy farming requirements.
(d) The commercial bank in which you have an account: It is a monopolistic competition as
the number of institutions that are identical yet provide distinct offerings. Also there are
a large number buyers in the industry and thus it is very crucial for the firms that are
operating to give quality products and services so that it can help them to attract a lot of
customers which can prove beneficial for them in the long run and also from the aspect
of growth and prosperity in the industry in which they are working.
(e) The automobile industry: Oligopoly in the automotive market as there are just handful
major vehicle manufacturers. It would be extremely tough to design your personal car as
well as the investment outlay is pretty huge and thus it is not at all possible for all the

firms to invest that hefty amount in the market and also to bear risk with it since a lot of
threats are attached with and thus the automobile sector comes in the oligopoly as there
are not many firms operating (Chand and Tung, 2019).
Question 6
Critically evaluate and explain:
a. In monopolistically competitive industries, economic profits are competed away in the long
run. Hence, there is no valid reason to criticize these industries’ performance and
efficiency.
b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic
profits.
Answer 6
a. Financial gains are fought off in monopolistic market sectors in the longer term, implying
that socioeconomic earnings would be zero due to entrance of new enterprises. They
merely make standard earnings. Since production effectiveness (P=ATCmin) is not
satisfied, and also because MR=MC, revenue increases marginal cost, allocating
effectiveness is also not achieved. There is no justification for criticising these businesses'
productivity and effectiveness (Charness, Gneezy and Henderson, 2018).
b. The production effectiveness (P=ATCmin) is not satisfied in prolonged period in context
of monopolistic competition, although there is zero financial gain due to entrance of other
competitors. Since there is item diversity in this sort of marketplace, demand is less
flexible (relative to completely competitive markets), and companies could regulate the
cost. They are the ones who set the prices. As a result, monopolistic competitiveness
produces monopolistic prices but not monopolistic earnings (Ding and Peng, 2018).

Question 7
What information does a government need if it wants to attempt to reduce a widespread
negative externality like air pollution? Who, typically, is actually in possession of that
information? How do markets in tradeable emissions permits solve the asymmetric
information problem affecting pollution abatement efforts?
Answer 7
The fundamental evidence that the administration requires in order to minimize air
pollutants is basically who is damaging and that too how much. This data is particularly available
from the infringing companies. They are conscious of the actual level of money which the sector
emits into the atmosphere, but 9 times on average out of 10, they will not share such knowledge
with the authorities. In that instance, the administration might request the statistics from the
province's environmental agency.
I feel that implementing remediation initiatives was not the most efficient intervention to
improve air pollution, particularly where businesses are really not outright lying to the authorities
about their environmental damage. Once licenses are implemented, though, they are provided to
every company, who could choose whether or not to utilise them to make its particular items or
just exchange them with other companies (Handfield, Graham and Burns, 2020).
In business, the free riding issue is a major concern and is regarded as an instance of
marketplace inefficiency. This problem arises when people receive all of the value of a product
or services sans contributing for it. As a result, the people have little motivation to give and must
rely on someone else to cover the costs. This places a significant strain on the resource's supplier.
Companies started to withdraw because the manufacturer was not adequately rewarded. As a
result, the linked asset could no longer be available.
Several factors, in my opinion, could lead to economic collapse. Nevertheless, I believe
that unintended consequence is the primary culprit, which really is similar to the free riding
dilemma. When a third entity (not the buying and selling) receives advantages as a consequence
of a deal, this is known as indirect effect. So because equilibrium of a commodity doesn't really
represent the real prices of such an item, marketplace collapse occurs. Equilibrium is the point
wherein the expenses of manufacturers and the rewards of consumers are equal, resulting in the

best costs of performance. When externalities are present, though, opportunities are created. This
is referred to as "commercial collapse."
The harm that a deal produces to a third entity is referred to as a spill over price. As a
consequence, the third entity is responsible for compensating for the trade. Consider pollution as
an example of this concept. Assume a company is creating goods, but their facilities are leaking a
large amount of hazardous gases into the air which members of the neighbourhood must inhale.
Those society members have no involvement in the creation of this maker's goods, yet they are
the people who have to suffer for the poor pollution levels. Spill over advantages, on either side,
are the inverse of spill over expenses. These are unconstrained benefits received by a third entity
as a result of the acts of someone else. For instance, if the administration spends tax money to
establish a communal playground, everybody, including those who do not contribute to the taxes
of the nation, has the freedom to enjoy it. As a result, such folks profit from other people's
wealth.
It is much simpler to collapse and fail and that too in context of a private sector
environment. Numerous manufactured products and services result in the free-rider issue, in
which customers reap the advantages sans contributing for them. As a result, producing such
commodities becomes unsustainable and unproductive. That, in my opinion, is really what
creates a private sector collapse. A public market collapse, on the other hand, is a little distinct.
Since businesses can't profit from it, no company needs to achieve a common benefit.
Nevertheless, demand for products generated by private marketplaces remains robust; even so,
whenever the sector lacks to distribute assets effectively, the economy collapses (Larrañeta,
Dominguez-Robles and Lamprou, 2020).
Question 8
Distinguish between the benefits-received and the ability-to-pay principles of taxation. Which
philosophy is more evident in our present tax structure? Justify your answer. To which
principle of taxation do you subscribe? Why?
Answer 8
According to the benefits-received concept, administrations must provide governmental
products and commodities in the very same way as private businesses do. Governmental