Microeconomics Assignment: Tax, Monopoly, Game Theory Solutions

This document presents a comprehensive solution to a microeconomics assignment. The solution addresses several key economic concepts, including the impact of a sales tax on different products like cigarettes and bottled water, considering factors such as price elasticity and revenue generation. It analyzes how a company with pricing power (monopoly market) should adjust its pricing strategy in response to changes in production costs, competition, and salary demands. Furthermore, the assignment delves into game theory, using a payoff matrix to determine the Nash equilibrium for competing real estate development firms. Finally, the solution examines short-run and long-run equilibrium scenarios for a firm, illustrating profit maximization and market adjustments. The assignment covers core microeconomic principles, providing a detailed analysis of market dynamics and strategic decision-making.

MICROECONOMICS

Economics
Answer – 1
Placing tax on cigarettes can be a great step as the tax on the tobacco will lead to the
reduction of smoking and use of tobacco. The taxation will affect the price and will, in turn,
bring more revenue to the government. There might be a small change in the price that means
the price of the cigarettes will increase but it is common parlance that the marginal increment
in the prices will not prevent the customers to buy it1. The increase needs to be very large
that will deter the customers in making a future purchase. But, if the government is simply
looking for the increment in the prices then imposing a new sales tax is a good idea that will
add up to the revenue.
Answer -2
(a) .
As the factory is not operating under the perfect competition market, it is assumed that the
company is operating under the monopoly market where the company contains the hold on
the product prices. If the rent on the production factory enhances then the company should
include the component of increment in the rent through the products. The pricing of the
product should be increased by way of showing certain additional features or providing add-
ons.
(b)
For a monopoly, we can trace a price effect. The price should be reduced to sell output that is
additional. Hence, if the marginal revenue on the additional units sold remains lower as
compared to the price because less revenue was generated for the previous units then the
price reduction needs to be done for the same amount for all the bowls.
(c)
1 Mankiw and Scarth. Macroeconomics. 82
.
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Economics
As the new entrant is entering the market, the existing supplier should raise the price due to
higher demand. The new entrant will thereby need the same materials, as well as elements to
offer the same kinds of products2.
(d)
This hike in the salary should not be related to the price because hiking the price at every
level will make the monopoly unprofitable. In this scenario, the negotiation should be done
with the CEO and then a decision should be made. However, the impact should not happen at
the price level.
Answer – 3
(a)
Column player
High Low
Row player High (1,1) (21, -3)
Low (-3, 21) (3,3)
Dominant strategy
If we look at Row player’s payoffs we see that column that ranks higher should be selected.
Since 21 is higher than 1. Then in the column player the same is selected. This is the
dominant strategy and the one that is highlighted in yellow will be the Nash equilibrium.
(b)
Drumph will be ready to pay anything because of the initial approach and to get a prior
chance in building the property. Hence, getting a permit is important for Drumpf and to get
this done Drumpf will be ready to pay anything.
2 Mathai, “Monetary policy”.
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Economics
Answer -4
a. Short run
Figure 1 Short-run equilibrium
From the diagram it can be seen in the short run, the company makes a supernormal profit.
The overall cost of the firm is shown in blue and the profit in red. The profit is more because
the average cost is less than the average revenue3. To compute it needs to be ascertained
where the quantity hit the coast line. The area that lies above the cost is the profit or loss for
the company.
b. Long run
Figure 2 Long run equilibrium
When it comes to the long run, more participants will enter the industry and as a result of it,
the price of the product will decline. This happens to owe to the increment in the output
supply and even the sot will enhance due to this because of intense rivalry for the factors of
3 Mankiw and Mark, P, Economics, 42
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Economics
production4. The firms will continue to enter the industry until the time the price becomes the
same as the average cost so that all earn a normal profit.
4 Braeutigam, Microeconomics, 52
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Economics
References
Braeutigam, Ronald. Microeconomics. Wiley, 2010.
Mankiw, Gregory and Taylor, Mark, P. Economics, Andover: Cengage Learning, 2012.
Mankiw, Gregory and , & William M. Scarth. Macroeconomics. Canadian ed, New York:
Worth, 2011.
Mathai, Koshyu, “Monetary policy: stabilizing prices and output.” International Monetary
Fund, April 18, 2019. https://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm
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