Economics Assignment: Elasticity, Costs, and Market Structures

This economics assignment solution delves into various key economic concepts. It begins by analyzing price elasticity of demand, comparing the elasticity of different goods and calculating elasticity using the midpoint formula. The solution then explores the impact of price changes on revenue and examines cross-price elasticity. Furthermore, the assignment discusses how changes in costs (variable and fixed) affect a firm's operations and profitability, including the impact of technological changes and government levies. The solution also analyzes market structures, including perfect competition and the behavior of price takers. The assignment concludes by addressing profit maximization strategies and the concept of dominant strategies in game theory, providing a comprehensive overview of economic principles and their practical applications in various market scenarios.

Economics 1
Economics

Economics 2
Table of Contents
Task 2:.............................................................................................................................................3
Task 3:.............................................................................................................................................9
Task 4:...........................................................................................................................................13
References:....................................................................................................................................19

Economics 3
Task 2:
1).
1.
The high-quality jewellery is more price elastic in comparison of a carton of milk.
2.
A tank of petrol is more price elastic as compared to a bag of oranges.
3.
Tiptop bread is more price elastic in comparison to all brands of bread.
4)
The demand curve D2 is more inelastic as compared to demand curve D1.
Working notes and Explanation:

Economics 4
Price elasticity of demand can be measured by using the midpoint formula. The formula of the
price elasticity of demand as below:
=(Q 2−Q 1) ÷(Q 2+Q 1)/2
( P 2−P 1) ÷( P 2+ P 1)/2
Price elasticity of demand for demand curve D1 is as below:
(300−200)÷(300+ 200) /2
(2.50−3)÷(2.50+ 3) /2
(100) ÷(500)/2
(0.5)÷(5.50)/2
0.1
0.045
= - 2.22
Price elasticity for demand curve D2 is as below:
(225−200)÷(225+ 200) /2
(2.50−3)÷(2.50+ 3)/2
(25)÷ (425)/2
(0.5)÷(5.50)/2

Economics 5
0.029
0.045
= - 0.64
On basis of above calculation, it can be stated that demand curve D2 is more inelastic as
compared to D1. It is because when the price of the product is $3 then the demand is 200 but at
the same time when the price decreased from $2.50 then demand is 225. This change represents
that change in the demand has a lesser effect due to change in the price but the effect of price is
higher. At the same time, when the price of the product is $3 then the demand is 200 as well
when the price decreases then the demand is 300 (Gans et al, 2014). It represents that due to
change in the price at a lower level than the demand of the products is higher at the D1 Curve
that means Demand Curve D1 is more elastic as compared to D2 Curve.
5.
Based on the below calculation, it can be defined that when the price of goods is $3.00 and
demand is 200 then the Revenue is $600. At the same time, when the price falls and become
$2.50 and demand D1 is 300 then the revenue of the company is $750. Whereas the price is
$2.50 and demand D2 is 225 then the revenue is $562.5 (Hubbard et al, 2012). Based on this, the
revenue of the company is higher when the D1 is 300 and price is $2.50 and revenue is lesser
when the D2 is 225 and price is $2.50.
Working Notes:
The calculation of revenue when the price is $3 and demand is 200 then revenue would be
calculated by using the below formula:

Economics 6
Revenue = Price × Quantity
= $3 × 200
= $600
If the demand curve is D1 then Revenue is as below:
= $2.50 × 300
= $750
If demand is D2 then the revenue is as below:
= $2.50 × 225
= $562.5
6)
The cross-price elasticity of demand for the petrol and fuel-efficient cars would be positive if the
price of fuel increases. This is because there would be the lesser impact of the petrol price
change on the consumption of fuel as in the market fuel-efficient small cars available. Therefore,
the increase and decrease in the price of the petrol do not have a negative impact on the demand
for petrol. However, cross-price elasticity of demand between the larger not very fuel-efficient
cars and petrol would be negative (Besanko and Braeutigam, 2010). It is because when the price
of petrol increases then it affects the savings and level of consumer’s expenditure negatively as
they have to pay a large amount for purchasing of petrol for their care that is fuel inefficient. The
cross-price elasticity of demand would be positive when the price of petrol decreases and cars
are fuel inefficient.

Price
Quantity demanded and
supplied of Banana
P1
P0
Q0Q1
Economics 7
7).
The cyclone damaged the crop of banana that can cause shortage of supply while increasing the
demand of banana. This increase the demand, which in turn lead the price of banana to be
increasing, as shown in below diagram:
Based on the above diagram, it can be said that there is relatively unitary elasticity of the demand
of bananas in the market. This is because the shortage of supply of banana causes a situation in
which the small change in price can cause huge change in the quantity of bananas.
8)

Economics 8
In the video, bananas were called luxuries as the price of the bananas rose by a higher amount
due to the cyclone. Due to rose in the bananas price, the bananas are called the luxuries. When
the bananas would be luxuries then it has an impact on the demand and supply curves that
demand of the bananas would be higher as the upward slope in the demand curve. However, the
supply of the bananas would be a constraint as cyclone destroyed the bananas. The bananas
would be in the category of griffin good in which the demand of the goods increases with the
increase in the goods price (McTaggart et al, 2015). Therefore, if bananas are the luxuries good
then the demand would be high and supply would be a constraint.

Economics 9
Task 3:
1.
The sign of new contract by the Samsung in terms of change in the price of transistors that are
used in its mobile phones. This will affect the variable cost of the company in the production of
mobile phones rather than fixed costs. It is because the price of the transistors depends on the
number of transistors quantity that used by the company. Along with this, the price of the
products dependent on their quantity that how many numbers of products company is purchasing
from the suppliers that affect only variable cost and have no impact on the fixed costs (Hubbard
et al, 2012). At the same time, the fixed cost of the company increases when the company pays
the fixed amount for the purchasing of products.
2.
If the federal government applies a levy per mobile phone providers then the fixed cost of mobile
phone providers would be higher. However, it does not influence the variable cost of the
company as government fixed the levy of $10, 00 000. It is because when the federal government
fixed the amount of levy then mobile phone providers need to pay the defined levy amount that
affects the cost of business organization. Along with this, the levy of the federal government is
fixed that would increase the fixed costs of the mobile phone provider as they need to pay $10,
00 000 to the federal government (Mcconnell, 2013). The main reason of increasing the fixed
cost of mobile is that when the government applies any levy or taxes then the company needs to
pay levy amount that enhances the cost of business operations.
3.

Economics 10
The increase in the company spending on the designing of new version mobile phone would
increase the variable cost of Samsung. It is because costs of the research and development in
terms of design depends on the designing of the new products that are not fixed. In this way,
when the company invests the larger amount of the research and development activity then the
variable cost of the company would be higher and vice-versa. Along with this, cost of the new
research and development on the designing the next version mobile phone would depend on the
company investment that can affect the variable cost (Hubbard et al, 2014). In this situation, the
fixed cost of the company would be a constraint because company invests the one time in
purchasing of the equipment for the research and development operations.
4.
The option B is the example of a business firm experiencing technological change. This is
because the rearrangement of the layout of the firm factory and initial set of the inputs is the
technological changes that affect the firm's operations and productivity positively. In the
technological changes, the firm makes the changes in the technology used and factory layout,
which represents that business firm, is experiencing the technological changes. The technological
changes reduce the cost of business operations at the same time increases the firm's productivity.

Economics 11
5)
A) Variable Cost = Total cost – Fixed Costs
= $30,000 – $10,000
= $20,000
B) When, Output is 10,000 then Average Variable cost and Average Fixed cost will be:
Average Variable cost = Variable cost / Quantity (Besanko and Braeutigam, 2010).
= $20,000 / 10,000
AVC= $2
Average Fixed Cost = Fixed Cost / Quantity
= $10,000 / 10,000
AFC = $1
C)
The Difference between the Average Total Cost and Average Variable Cost decreases when the
Output increases. This is because of Average Total cost = Average Variable cost + Average
Fixed cost (Mankiw, 2011).
6):
Amazon, Barns and Nobles, and other online bookstores have occupied the large portion of the
total market in Australia as well as rest of the world. The online retailing stores are dominating

Quantity
Import
Price
D
S
P
1
Q Quantity
Import
Price
A
MC
Q
AT
C
AR=MR
Jim’s StatusIndustry Status
D
Economics 12
the market and causing tough competition for bricks and motors bookstores. A number of offline
stores have shut down over 15 years. This is because of the cost of selling. The cost of online
retailing stores is lower than the cost of offline stores, make them prevailed in the market. The
independent bookseller has decreased over the years due to their high cost and lower profit
margin (Case et al., 2012). This can be demonstrated in the following diagram:
Based on above diagram, it can be said that the competition in the market was increased that
reduced the profit margin of the independent seller. They suffered a loss that led them to shut
down their stores.