Economics Assignment: Market Structures, Investment, and Firm Behavior

This economics assignment delves into various concepts, starting with a game theory scenario involving a factory's pollution and its impact on a fisherman, analyzing the firm's decision-making process based on cost-benefit analysis and social efficiency. It further explores investment decisions, comparing returns from different investment options and examining the villagers' investment choices. The assignment also addresses supply and demand dynamics, specifically focusing on the impact of tomato prices on the pizza market and the interplay of complementary goods. Cost curves and production functions are analyzed to understand the relationship between input and output. Finally, the assignment investigates perfect competition, including production decisions, cost analysis, and long-run market equilibrium. The document provides detailed explanations and graphical illustrations to support the analysis.

Economics 1
ECONOMICS
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Economics 2
Question 1
In economics and business in general, the objective of every firm is to maximize its
utility (Phaneuf & Requite,2016). Pro will operate without the filter since it’s more economical.
Setting up a filter will cost him a monthly cost of $20 which is unnecessary. Pro Factory shall
also not be penalized for running without the filter implying that it would face no legal risk. The
choice is socially efficient since the toxin is short lived and Pro that would not negatively impact
its reputation among the public. This scenario is a case of game theory where the two parties can
either collaborate or compete. Since they cannot communicate, Pro would take decisions that
maximize its utility without considering impacts on Brandon. The decision not to eliminate toxic
waste would comply with efficient surplus where firms produce at the lowest costs. The filter if
installed would benefit Brandon more than Pro since the marginal benefit to Pro is insignificant.
Question 2
(a) Investment is putting money in to a venture that promises returns in future. Investors
select investment tools based on their risk tolerance levels and expected returns. The risk-
return trade off theory states that higher expected returns attract higher risks (Eiteman,
Stone hill & Moffett, 2016). Project appraisal assumes that investors are rational, and
hence make their investment decisions wisely. Here, we examine the expected returns
from each investment after a time horizon of one year in order to conclude as to which
investment to take.
Interest on cash investment of $100.
I= (P*R*T)/100
= (100*0.11*1) =$11 Gains from one steer grazing alone= $ 27

Economics 3
Therefore, if the villages make their investment decisions unilaterally, 5 bulls will be sent
to the commons. This is because given that the villagers make rational decisions, they would
prefer to purchase bulls since they offer higher returns.
(b) The villagers’ total income would be
$9*5= $45
Question 3.
Demand is defined as the quantity of goods that customers are willing to purchase at a
particular price in a market (Gopinath, Helpman & Rogoff, 2014). Supply on the other hand is
the quantity of goods that sellers offer to buyers in the market. The demand of tomatoes might be
affected by the many factors including supply and demand of complimentary and substitute
goods. Tomatoes are ingredients used in making pizza. This implies that pizza and tomatoes are
complimentary goods. A rise in price of tomatoes increases the production cost of pizza leading
to an increase in pizza prices. From figure 1 below, the original equilibrium point is at F. The
rise in tomato prices led to a decline in pizza demanded and increase in price leading to a shift of
the supply curve to the left.
Figure 1

Economics 4
Hamburger and pizza are complimentary goods. The increase in pizza prices resulting
from increased tomato prices influences customers to purchase hamburger in place of pizza. This
leads to a decrease in pizza demand. In figure 2, the original equilibrium point of pizza is R.
However, when some consumers decide to consume hamburger in place of pizza, the demand
curve shifts leftwards to point T.
Figure 2
Question 4.
Figure 3 below shows a production function and total cost curve. The cost of producing
wheat is directly proportional to the output generated. The total cost curve is straight since total
cost is obtained by multiplying quantity of seeds by a constant (price per unit). The shape of
production curve depicts the law of diminishing returns.

Economics 5
0 0.5 1 1.5 2 2.5 3 3.5
0
5
10
15
20
25
30
35
Production funtion and total cost funtion of
wheat
Figure 3
Question 5.
Average Total cost= Total cost
Quantity =$320,000/5=$64,000
Marginal cost= change∈cost
change∈quantity = (320,000-275,000)/ 1=$45,000
The graph below shows the average total cost curve and a marginal cost curve of a typical
firm. The Marginal cost curve intersects with the average total cost curve at the minimum point
of the average total cost (ATC) curve (Egan & Gumaraes, 2017). This is because the MC curve
normally rises until a point at which it is equal to the ATC curve.

Economics 6
Figure 4
Question 6.
Both. This is because the company chooses quantity such that MC is equivalent to the
price P so that, profit is maximized. The long run effect of free entry and exit triggers the price of
the product to the minimum point on the ATC curve (Bernanke, Antonovics & Frank, 2015) .The
diagram below illustrates the argument.
Figure 5
Question 7.

Economics 7
(a) A perfectly competitive market is a market structure characterized by free entry
and exit, identical products, and enormous competition. When marginal revenue and
marginal cost are same, the prices of blueberries are would be lower than the average
total cost.
(b) The Figure 6 below shows the production behavior of the blueberries market
when it is making losses. Figure 7 shows the production curve of a perfectly competitive
market.
Figure 6: Present situation in typical firm
Figure 7: Present market situation

Economics 8
(c) In the long run, the company would have to exit the market given that demand
patterns remain the same. The price of blue berries would decline. The price would lie
below the ATC. The quantity supplied by each firm would decline to an extent that
covers its average variable cost.
References
Bernanke, B., Antonovics, K. & Frank, R., 2015. Principles of macroeconomics. New York:
McGraw-Hill Higher Education.
Eiteman, D.K., Stonehill, A.I. and Moffett, M.H., 2016. Multinational business finance. Pearson
Higher Ed.
Egan, M. & Gumaraes, 2017. The single market: Trade barriers and trade remedies. JCMS:
Journal of Common Market Studies, pp. 294-311.

Economics 9
Gopinath, G., Helpman , E. & Rogoff, K., 2014. Handbook of international economics. New
York: Elsevier.
Phaneuf, D. J. & Requite, T., 2016. A course in environmental economics: theory, policy, and
practice. Cambridge: Cambridge University Press.