University Microeconomics Assignment Solution, BUECO5903

This document presents a comprehensive solution to a microeconomics assignment, addressing key concepts such as elasticity of demand, market structures (perfect competition, monopoly, monopolistic competition, and oligopoly), scarcity, and the impact of government intervention through taxation. The assignment analyzes the cross-price elasticity of demand between substitute products, the implications of price changes on revenue, and the determination of optimal pricing strategies. It also delves into the differences between accounting, economic, and normal profits, and explores the effects of changing demand and supply conditions on market equilibrium. The solution incorporates diagrams to illustrate concepts like income effects on inferior and normal goods, the impact of price changes on complementary and substitute goods, and the effects of pollution costs and taxes in the gold market. Furthermore, the assignment examines the characteristics of monopolistic competition and oligopolistic markets, including collusion incentives. The solution provides detailed explanations and reasoning for each answer, making it a valuable resource for students studying microeconomics.

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

1Microeconomics
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................8
Answer 6..........................................................................................................................................9
Answer 7........................................................................................................................................10
References......................................................................................................................................11

2Microeconomics
Answer 1
(i)
Cross price elasticity of Stop Deca y' s=
QSD 2−QSD 1
QSD 2 +QSD 1
2
PDF 2−PDF 1
PDF 2 + PDF 1
2
¿ , Cross price elasticity of Stop Deca y' s=
1500
14500
2
5
65
2
¿ , Cross price elasticity of Stop Deca y' s=−1.35
The cross price elasticity of the two products found to be -1.35 highly elastic and this indicates
they are substitute products.
(ii)
Price elasticity of demand=
QSD 2−QSD 1
QSD 2 +QSD 1
2
PSD 2−PSD 1
PSD 2 + PSD 1
2
¿ ,−1.5=
8000−6500
8000+6500
2
PSD 2−25
PSD 2+ 25
2

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¿ ,−1.5=
1500
14500
PSD 2−25
PSD 2 +25
¿ , PSD 2=21.77
Stop Decay has to reduce its price to $21.77.
(iii)
Revenue before price change=25 ×6500
¿ , Revenue before price change=$ 162500
Revenue after price change=21.77 ×8000
¿ , Revenue after price change=$ 174160
(iv) In part (iii) after reduction in price of electric toothbrush of Stop Decay the revenue has
increased and thus the result is desirable. The factors that are needed to consider are level of
profit margin, the portion of marginal cost curve where the firm is operation that means if firm is
operating at MC=MR or not and the firm should earn at least zero economic profit.

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Answer 2
(a) Accounting profit is difference between total revenue and explicit cost and economic profit is
the difference between accounting profit and implicit cost (Kim & Tejeda, 2018). On the other
hand, normal profit is the amount of profit required by a firm to survive.
(b) (i) The demand for emu meat has increased but the price is remain unchanged. Therefore,
with increased demand the sales of the product increases and thus total revenue increases and
thereby the profit of the industry increases.
(ii) The industry has low barriers to entry and thus with increased profitability new forms will
enter the industry with an objective of making profit and thus due to this reason resources enter
the industry.
(iii) The industry in the long run will earn zero economic profit because in the long run every
industry becomes perfectly competitive due to presence of technological innovation and all cost
is variable.
(iv) In the long run only normal profits occur in this industry because there will be no fixed cost
that means firms of the industry can change any of the cost structure. The firms can also avail
benefit of technological innovation (Cranmer & Lewin, 2017). Thus, there is no barriers to entry
and exit in the industry. Therefore, firms will enter the industry if any situation of super normal
profit occurs and hence entry will occur until the profit of the industry reaches normal profit.
Answer 3
(a) Goods and services are scarce because resources are scarce, means that in the world available
resources are limited. Resources means factors of production such as labour, raw materials, land

5Microeconomics
and capital (Shepard, 2015). Population of the world cannot grow forever and it is true for capital
because it cannot be created without any accountability. On the other hand, amount of raw
materials available to the limit the world can provide such as iron, coal, petroleum and any other
natural resources (Meuris & Leana, 2015). Natural resources are base of any production and thus
limitation in natural resources limits the production of any good. Additionally, land is a limited
resource as the area of the world is limited. Therefore, it can be concluded that with limited
resources available production of goods and services are limited.
(b) In the five year period, the number of fans for the team has increased. In addition to that, the
population must have increased and thus number of people watching football should increase
too. Due to this reason, the demand for tickets increased by 30 percent. The rise in demand could
possibly the cause of price of tickets if it is not due to rise in inflation rate (Chan & Gillingham,
2015). The rise in demand in this case occurred due to rightward movement of the demand curve.
Hence, the changes in the demand and price of the tickets does not imply upward sloping
demand curve.
Answer 4
(i)
Diagram 1: Income effect on inferior good

6Microeconomics
Source: (Created by the Author)
Inferior good are the good that people tend to give up if a better option is available.
Therefore, with increase in income of individual P to P* the quantity demanded for the good
decreased from Q to Q*.
(ii)
Diagram 2: Effect of price fall on demand
of substitute good
Source: (Created by the Author)
The fall in price of L from P1 to P2 will increase the demand for the product but the
demand for substitute good will decrease from Q1 to Q2 because consumers has the option to
gain similar utility from consuming good L at a lower price.
(iii)

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Diagram 3: Income effect on demand of normal good
Source: (Created by the Author)
The income elasticity of normal good is 1 and thus with fall in income from I1 to I2 will
reduce the demand for normal good K from Q1 to Q2.
(iv)
Diagram 4: Effect of price increase on
demand of complementary good
Source: (Created by the Author)
Price of J has increased from P1 to P2 and as a result, the demand for K declined from Q1
to Q2. This happens because K is consumed together with J (Llanes, Mantovani & Ruiz-Aliseda,
2019). Thus, fall in demand of J due to its price increases decreases the demand for its
complementary good K.

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Answer 5
Diagram 5: Gold Market
Source: (Created by the Author)
(i) The supply curve S1 does not incorporate all the cost of production of gold because it does
not include the social cost created by the pollution of gold mining (Heathfield, 2016). The
pollution causes environmental harmful effects cost of which is not included.
(ii) The government wishes to internalize the cost of pollution and thus the price is raised to P2
by imposition of tax. P2 is the price where pollution cost is internalized (Kaddoura & Nagel,
2018). At this price, the quantity demanded will reduce to QS. Thus, due to government tax the
equilibrium price and quantity of the market changes to P2 and Q2 respectively.
(iii) Due to the incidence of the tax, the sales of the gold will decrease and thus the producer
surplus will decline due to fall in revenue of the gold sellers. The surplus of buyers is also lost
due to increase in price.

9Microeconomics
Answer 6
Diagram 6: Market of lawn mowing before
takeover-perfect competition
Source: (Created by the Author)
Diagram 7: Market of lawn
mowing after takeover-monopoly

10Microeconomics
Source: (Created by the Author)
In case of perfectly competitive market, the price of product PC is lower than monopoly
market price at P*. It happens because monopoly market has single firm where as perfectly
competitive market has numerous firm (Yueshen, 2017). Thus, in monopoly firm has extreme
power over the market. In perfectly competitive market, equilibrium quantity is at QC which is
greater than the quantity in monopoly market at Q*. Thus, it is clear that allocation of resources
is better in the case of perfect competition.
The monopoly would not survive because in the long run every industry becomes
perfectly competitive due to non-existence of fixed cost. Apart from this every industry has the
benefit of technological innovation and thus the in the long run a firm cannot maintain its
monopoly power and the industry becomes perfectly competitive.
Answer 7
(a) In monopolistic competition, firms cannot set their prices on their own because in this kind of
market structure there are numerous firms (Nikaido, 2015). Even though the products are
differentiated the differences matter very less to the consumers as there is availability of almost
similar products. Thus, the sellers do not have market power and cannot set prices.
(b) The oligopolistic firms have incentive in colluding because the firms can act as a single firm
in the industry. The, firms will set price and take market decisions by cooperating with each
other thereby able to charge high price like monopoly firms. Therefore, the firms earn super
normal profit after collusion. However, the success or failure of the collusive efforts of the firms
depend on cooperation among the firms and scope of profit from non-cooperating or betrayal.

11Microeconomics
References
Chan, N. W., & Gillingham, K. (2015). The microeconomic theory of the rebound effect and its
welfare implications. Journal of the Association of Environmental and Resource
Economists, 2(1), 133-159.
Cranmer, S., & Lewin, C. (2017). iTEC: conceptualising, realising and recognising pedagogical
and technological innovation in European classrooms. Technology, Pedagogy and
Education, 26(4), 409-423.
Heathfield, D. F. (2016). An introduction to cost and production functions. Macmillan
International Higher Education.
Kaddoura, I., & Nagel, K. (2018). Simultaneous internalization of traffic congestion and noise
exposure costs. Transportation, 45(5), 1579-1600.
Kim, M. K., & Tejeda, H. (2018). Implicit Cost of the 2010 Foot-and-Mouth Disease in
Korea. Studies in Agricultural Economics, 120(1316-2018-5020), 166-173.
Llanes, G., Mantovani, A., & Ruiz-Aliseda, F. (2019). Entry into complementary good markets
with network effects. Strategy Science.
Meuris, J., & Leana, C. R. (2015). The high cost of low wages: Economic scarcity effects in
organizations. Research in Organizational Behavior, 35, 143-158.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Shephard, R. W. (2015). Theory of cost and production functions. Princeton University Press.

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Yueshen, B. Z. (2017). Uncertain market making. Finance Down Under 2016 Building on the
Best from the Cellars of Finance.