Microeconomics Solutions | Best Assignment

Running head: Microeconomics
Microeconomics
Name of the Student
Name of the University
Student ID

Microeconomics1
Table of Contents
Answer a..........................................................................................................................................2
Answer b..........................................................................................................................................6
Answer c..........................................................................................................................................9
Reference List................................................................................................................................12
Appendix........................................................................................................................................15

Microeconomics2
Answer a
Theory of microeconomics suggests various concepts that help firms in the market to
make price and output decisions in order to maximize revenue and sustain in the market. One of
such theories is price elasticity of demand (Jawad et al., 2018). The price elasticity of demand is
defined as the alteration in amount of quantity demanded in response to alteration in price. The
price elasticity of demand is of various types and they own price elasticity of demand and cross
price elasticity of demand.
Own price elasticity of demand is defined as the alteration in amount of quantity
demanded of a product due to alteration in its own price. Similarly, the cross price elasticity of
demand is the alteration in amount of quantity demanded of product due to variation in price of
another product (Huang et al., 2018). In this case both the product could be substitutes or
complementary to each other. Finally, income elasticity of demand is the variation in amount of
quantity demanded of a product in response to change in income of the consumers.
The price elasticity of demand could be inelastic, unit elastic or highly elastic in nature. A
product is called as inelastic if the alteration in percentage of quantity demanded of a good is
lower than the alteration in percentage of price (Miller & Alebrini, 2016). Alternatively, if the
percentage alteration in amount of quantity demanded of a product is larger than the alteration of
percentage of price then the product is called as highly elastic. Then again, if the alteration in
amount of quantity demanded of a good is same as the alteration of percentage of price then the
good is termed as unit elastic. The price elasticity of demand is dependent on the type of good
that means if the good is normal, then in most cases, the price elasticity of demand is unit elastic.
In the case of necessary and demerit goods, the price elasticity of demand is always inelastic in

Microeconomics3
nature (Evans & Popova, 2017). Further, if inferior goods are considered then the price elasticity
of demand for such good as per the theory and empirical evidence is more than 1 that means it is
highly elastic in nature.
The above discussed concept of price elasticity of demand is an essential part of business
decision making. The notion of price elasticity of demand aids the firms or producer of goods to
understand the category of the product they produce and the kind of product their competitors
produce. It also helps to understand the tradeoff between their product and their substitute or
complementary products (Sarkar & Lee, 2017). With the use of concept of price elasticity of
demand, the firms can make the choice of the suitable price strategy. On the other hand, in the
case of firms that have complementary and substitute products it is easier to understand the
impact of price change of other product on their own product and take price decision depending
on the value of price elasticity of demand. It means that the firms has to alter its price or supply
if the product is highly elastic but if its highly inelastic then such effective strategies are not
required.
The price elasticity of demand for soft drinks, other sweetened drinks and sugary
products is area of interest for the producers of the products because business strategy and
pricing decision depends on it (Artega, Flores & Luna, 2017). Thus, a study has been conducted
in Chile regarding price elasticity of the sweetened drinks and foods. As per the journal article,
Chile is the second largest consumer of sugary drinks of the world if per capita consumption of
the drinks are considered. Researches have showed that the problem of obesity is connected with
the habit of sugary drinks consumption (Wang, Rojas & Colantuoni, 2016). Due to this, the study
has been conducted to find the responses of the consumers to the change of price of the products
in the country. The study has identified that the own price elasticity of demand in case of soft