Economics Assignment: Market Structures, Pricing, and Cost Analysis

This economics assignment answer sheet provides detailed solutions to questions covering various economic concepts. The assignment analyzes the impact of a soda tax, exploring scenarios with elastic and inelastic demand, and explaining the rationale behind sin taxes. It also examines UBER's business strategy, considering short-run and long-run decisions based on fixed and variable costs. The assignment further delves into market structures, including monopolistic competition and monopoly, analyzing their pricing control, advertising strategies, and profit scenarios. It explains the conditions for loss minimization, the requirements for price discrimination, and the characteristics of oligopoly markets, including the kinked demand curve. Finally, the assignment includes a case study of a gym, calculating total revenues, explicit and implicit costs, and economic profit.

Running Head: ANSWER SHEET
Economics Assignment
Answer Sheet

ANSWER SHEET 1
1. When Chicago put in the tax on soda to raise revenue they were hoping that
demand was _________inelastic________ (4 points)
When the price of a commodity increases by tax, the quantity demanded falls.
If the price elasticity of a commodity is high, a small increase in the price of the
commodity will lead to higher contraction in the quantity demanded and vice
versa.
When government imposes tax on a demand inelastic commodity; the revenue
of the government increases. People will continue their consumption even at
higher price and the extra amount will be pocketed by the government.
2. Chicago was using the soda tax as a traditional Sin Tax.
Explain Why a Sin tax is a Win-Win tax
Sin tax is imposed on commodities that are viewed as vices. Applying tax on
such commodities on one hand will discourage their consumption by the
masses and will benefit the government by increasing the revenue for
development. Thus, it is a win-win tax.
a. If demand is Elastic (4 points)
When the elasticity of soda is elastic, people will reduce their
consumption with the increase in price (due to tax). Even when the tax
rate is small, the demand will fall significantly due to price elasticity
(NTRC, 2012). The revenue for the government will also increase as
some of the consumers will continue the consumption. There is welfare
of the society as the people are discouraged from the consumption of
soda.
b. If demand is Inelastic. (4 points)
When the elasticity for soda is inelastic, people will continue their
consumption even at higher prices. Imposing a sin tax is a win-win tax as
it results in the revenue of the government. People will consume the
soda irrespective of the rise in price due to tax and the government can
increase its revenue by charging higher. Also, some people will be
discouraged from consuming soda due to increased price.
3.

ANSWER SHEET 2
a. Why would UBER be willing to Stay open? ( 4 points)
Like other big companies, UBER operates at losses to increase its
market share. It wants to tap the potential of all the markets across
the globe. When they are able to capture a larger market share, they
can cover their losses and reduce down the costs. This will eventually
attract the investors to their company who will be willing to invest
more and more capital. Loss minimization by UBER is an objective
where it is unable to maximize its profits, given the market
adversities. Thus, it tries to minimize its losses. UBER has
expectations of growth through increased market share. The
company is satisfied by reducing losses which shows scope for
improvement to the investors.
b. Use fixed costs and Variable costs to explain whether the decision is
short-run or long-run? (4 points)
To sustain in the market, a firm needs to make at least earn normal
profits in the long-run. In case of short-run, the firm must be able to
cover its variable cost per unit (Average Revenue= Average Variable
Cost). Normal profits are the profits where the total revenue of a firm
is equal to its total cost. It is the profit at the minimum level, which is
required for the firm to sustain in the business. UBER is able to cover
its average variable cost in the short-run. It is also able to earn
normal profits in the long-run. The investors are willing to invest in
the company, which helps it to sustain in the business and cover its
costs.
Make sure you use the textbook and class notes to answer these
questions explaining the rules of maximizing profits and minimizing
losses.
4. Graph 1
A. Name of Market Structure (3 points)
Monopolistic Competition
b. Ability to control prices. (3 points)

ANSWER SHEET 3
Monopolistic competitive firms have some control over the price control in the
market. This is achieved because of product differentiation.
c. Spending on advertising and marketing (3 points)
The firms spend high on advertisement and marketing to differentiate their
product from that of the other firms. The products are slightly differentiated and
hence the selling cost is high to differentiate their product in the eyes of the
consumers and to portray that the product is better than others in the market.
d. Pure profit, Normal profit or losses. (3 points)
The profits in a monopolistically competitive market turn to zero in the long-run.
If the firms earn super-normal profits in the short run, new firm will be attracted
and will enter the market. This will continue till the profit turn to zero in the long-
run. It is opposite in the case of losses.
5. Graph 2
A. Name of Market Structure (3 points)
Monopoly
b. Ability to control prices. (3 points)
Monopoly has infinite control over the pricing. Monopoly has only one seller who
price discriminates. Since no close substitutes are available, the monopoly has full
control over the prices (Mishra, 2013).
c. Spending on advertising and marketing (3 points)
Monopoly firm advertises only to inform the customers and not to differentiate
its product from the others. They are only informative and not competitive. The
selling cost in monopoly is nill or very low.
d. Pure profit, Normal profit or losses. (3 points)
Monopoly sets the output price over the marginal cost. The individual earns
positive economic profit.
6. The loss minimizing level of output is between which MR levels ___equals
MC________ and ____AVC<P<ATC________________

ANSWER SHEET 4
(8 points)
A firm will produce the output level where the marginal revenue is equal to the
marginal cost to minimize the losses in the short-run. At this point, the price
should be greater than the average variable cost. Also, the average total cost
must exceed the price. The rule applies to the firm incurring short-run economic
losses which are less than the total fixed cost.
7. Explain why all firms do not price discriminate. (Be sure and include the 3
requirements to price discriminate.) (9 points)
Price discrimination refers to the situation where the firm charges different prices
from different customers for the same commodity. Only a price maker firm can
price discriminate. There must be imperfect competition and the demand curve
must be downwards sloping. The ability to discriminate the prices is based on the
following factors:
 Separated markets: It is important to have separated markets based on
geographical conditions so that people do not resale the commodity and
gain from higher prices of other markets.
 Elasticity of demand: The elasticity of demand must vary from customer to
customer for the seller to charge different prices (James, 2013).
 Administration cost: Separation cost of markets must not be high for the
purpose of administration. It is easier to charge different prices when it is
cheap to separate the market from the others.
If a firm is not able to fulfill the above mentioned conditions, it cannot price
discriminate.
8.
Indicate whether the inputs below are Variable (V) or Fixed (F) in the
short run (12pts)

ANSWER SHEET 5
Input Output Fixed Variable
Batteries In Computers Yes
Fire insurance In Dry cleaning Yes
Lease In store Yes
Property tax for Commercial
Real Estate
Yes
Tires In Trucking Yes
Depreciation In Real Estate Yes
9.
A. Name the market structure that typically has price wars. (4 pts)
Oligopoly is the market structure which has price wars (Rosenberg & O’Halloran,
2014). There are few dominating firms which sell slightly differentiated goods. The
firms monitor and respond the pricing of other firms in the market.
B. Explain why this market structure has a kinked demand curve. (8pts)
An oligopoly firm faces a kinked-demand curve due to the competition from other
firm in the market (Choi, 2014). If the price setting firm chooses to increase the
price above the equilibrium price, the other firms in the oligopolistic market will
not response to the change on their own. The demand curve for the oligopoly will
be more elastic in this case. Thus, the oligopoly faces a kinked-demand curve
because of different price elasticity due to competition.
10.
A. What are Jo’s total revenues? (3 pts)
Total revenue will include the revenue over cost from the gym plus the 2%
interest earned on corporate bonds.
Total revenue= $1000*800
= $800,000
B. What are Jo’s explicit costs? In numbers (3 pts)

ANSWER SHEET 6
The explicit cost of Jo will be equal to the sum of fees of instructors, equipment,
maintenance, insurance and depreciation.
Explicit Cost = $800*800
= $640,000
C. What is her accounting profit? Numbers (3 pts)
Accounting profit is the total revenue over the explicit costs (Comparison
between accounting profit and economic profit and its effect on optimal point of
production, 2013).
Accounting Profit= Total Revenue – Explicit Costs
= $800,000 - $640,000
= $160,000
D. List 2 important implicit costs that Jo has not included. ( in numbers 3 pts)
The implicit cost of Jo will include the foregone salary to open the gym and the
interest rate foregone on the corporate bonds.
Implicit cost = $95000 + 2%*$200,000
=$95,000 + $4,000
=$99,000
E. What is Jo’s pure economic profit (loss) numbers? (3 pts)
Economic Profit = Total Revenue – (Explicit Costs + Implicit Costs)
= $800,000 – ($640,000+$99,000)
=$61,000
Jo earns an economic profit $61,000.

ANSWER SHEET 7
References
Comparison between accounting profit and economic profit and its effect on
optimal point of production. (2013). European Online Journal of Natural
and Social Sciences , 02(03), 493-499. Retrieved May 03, 2018, from
european-science.com/eojnss/article/download/443/224
Choi, H. (2014, October 07). Tearing the Kinked Demand Apart: The Contradictory
U-Shaped Cost Theory. SSRN, 1-8. Retrieved May 03, 2018, from
https://poseidon01.ssrn.com/delivery.php?
ID=1210831230211010280900941250651020860410030660720280921070
990811220001241010211051061220220311220450370420260191030671
180300740980460030860340091130211250000970981070630030510931
010721250961101270301020800010300
James, O. K. (2013). Factors Affecting the Application of Price Discrimination in the
Hospitality Business in Yenagoa, Bayelsa State. European Journal of
Business and Management, 05(25), 66-75. Retrieved May 03, 2018, from
http://pakacademicsearch.com/pdf-files/ech/517/66-74%20Vol
%205,%20No%2025%20(2013).pdf
Mishra, T. (2013, November 01). Managerial Eonomics. Retrieved May 03, 2018,
from NPTEL: http://nptel.ac.in/courses/110101005/downloads/Lecture
%2027.pdf
NTRC. (2012). Deadweight Loss and Taxation. NTRC Tax Research Journal, 14(06).
Retrieved May 03, 2018, from
http://www.ntrc.gov.ph/images/journal/j20121112a.pdf
Rosenberg, S., & O’Halloran, P. (2014, July 02). Firm Behavior In Oligopolistic
Markets: Evidence From A Business Simulation Game. Journal of Business
Case Studies, 10(03). Retrieved May 03, 2018, from
https://www.cluteinstitute.com/ojs/index.php/JBCS/article/download/
8714/8695/

ANSWER SHEET 8