Microeconomics and Macroeconomics Assignment | Answers

Running head: MICROECONOMICS AND MACROECNOMICS
Microeconomics and Macroeconomics
Name of the Student
Name of the University
Student ID

MICROECONOMICS AND MACROECNOMICS1
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................5
Answer 4..........................................................................................................................................7
Bibliography....................................................................................................................................9

MICROECONOMICS AND MACROECNOMICS2
Answer 1
The company has invented a drug that helps to grow new hairs and thus it is helpful for
bald men. The objective of the company is to make as much profit as possible by selling these
products. It should be noted that the profit of the company will increase only in the scenario
when the company will be able to sell as many product at high prices. However, it is known as
per the theory of demand that price and demand shares an inversely proportional relationship1. It
means that with rise in price demand of a product falls and alternatively with fall in price
demand rises. There, if the company increase the price of the newly developed product then the
demand of the product might fall. The main parameter for the firm to understand whether to
increase price of the product to gain more profit is to find whether the revenue has increased
after increasing the price or not. This can also be understood from the price elasticity of demand
for the product. It is given that the price elasticity of demand for the product is 1.4 at the present
price. Therefore, it can be inferred from the value that with 1% increase in product price the
demand for the product will decline by 1.4%. The demand for the new product of the company is
thus relatively price elastic. Thus, it is clearly visible that with rise in price the demand for the
product falls more than the proportion of price increase2. Hence, it can be said that revenue of the
company from selling this product falls as the price increases. This phenomenon can be
explained by graphical illustration too. Figure 1 is drawn to explain this phenomenon. In figure
1, P is the current price and Q is the current demand for the new product of the company. Thus,
if the price increase from P to P1 then the quantity demand for the product will fall from Q to Q3.
1 Miller, Mark, and Anna Alberini. "Sensitivity of price elasticity of demand to aggregation,
unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data." Energy
Policy 97 (2016): 235-249.
2 Zetina, Carlos Armando, Ivan Contreras, and Jean-François Cordeau. "Profit-oriented fixed-
charge network design with elastic demand." Transportation Research Part B:
Methodological 127 (2019): 1-19.
3 Loomis, John B., and Michael H. Thomas. "Pricing and Revenue Capture: Converting
Willingness to Pay into." Object Relations and Intersubjective Theories in the Practice of
Psychotherapy (2019): 255.

MICROECONOMICS AND MACROECNOMICS3
However, it can be noticed from the figure that the fall in demand is greater than the rise in price
and thus it can be concluded that the revenue PQ earned at previous price is greater than the
revenue P1Q1 earned from the current price. Thus, it is suggested that given the price elasticity
of demand the company should not increase its current price.
Figure 1: Elastic demand
Source: (Created by the Author)
In a new scenario if price elasticity of demand for the product is 0.6, then it can be said
that the demand for the product is price inelastic4. It means that the proportion of fall in demand
is lower than the proportion of rise is price of product. That means if the in figure 2 the change in
price from P1 to P2 is greater than the fall in demand from Q1 to Q2. Thus, in this case rising
price will increase revenue and thereby profit.
Figure 2: Demand inelastic
4 Geerolf, François. A Theory of Demand Side Secular Stagnation. UCLA Working Paper.
https://fgeerolf. com/hansen. pdf, 2019.