Analyzing Economic Scenarios in Microeconomic Theory and Applications

The document presents an analysis of three distinct microeconomic situations. First, it explores the impact on Swine Company's ham products when cattle meat availability declines, focusing on cross elasticity of demand between these substitutes. It assumes a fixed market demand and consumer preference for ham over beef, leading to potential price increases due to heightened demand. Second, it examines how Amazing Institute's monopoly on a vaccine responds to a new tax, predicting a 25% price hike transferred to consumers, with some possibly priced out. Lastly, the document calculates profit maximization in a scenario where production is limited by resource costs, determining that producing four sets of dresses yields maximum profits given specific cost constraints. Each section underscores assumptions and economic principles like monopoly power, elasticity, and cost-based production limits.

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Micro Economics
[Type the document subtitle]
11/5/2017
Com

Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5
Question 4........................................................................................................................................7
Bibliography....................................................................................................................................8
Diagram 1 Law of Returns to Scale for Awesome Industries.........................................................4
Diagram 2 Cross Elasticity between products (ham) of Swine Company and products of cattle
ranch................................................................................................................................................5
Diagram 3 Profits accrued by Amazing Institute............................................................................6
Diagram 4 Effect of taxes of Prices. Total Output may shift slightly towards left to Q2...............7

Question 1
The law of Returns to scale helps understand the effects of increase in the production capacity of
the firm on the total costs of every unit produced. According to the law, the firm may experience
three stages:(Chauhan, 2009)
Stage 1: Increasing Returns to Scale
The firm may have increasing returns to scale i.e. the total output will increase in a greater
proportion to an increase in the production capacity.
Stage 2: Constant Returns to Scale
The firm may have constant returns i.e the total output may increase in the same percentage as
the increase in the production capacity.
Stage 3: Diminishing Returns to Scale
The firm may have diminishing returns i.e. the output may increase at a smaller percentage than
the increase in the production capacity i.e. returns are diminishing

Diagram 1 Law of Returns to Scale for Awesome Industries
Source: Prepared by Author. Adapted from Chauhan 2009
The firm should stop increasing the capital units or the production capacity whendiminishing
returns are accrued.
Question 2
The neighboring ranch cattle is losing weight and decreasing substantially is numbers. It is
assumed here that this is not due to a communicable disease that may also affect the products of
Swine Company). In such a case, the total production of cattle meat products (example: beef)
sold by the ranch is declining. Cattle meat products are close substitutes of the ham. A decline in
close substitutes may increase the demand for products of the Swine Company. The extent to
which the demand for products of Swine products will increase for every percentage decline in
the availability of cattle meat will depend on the cross elasticity of demand for the two products.

There are several assumptions made in this case:
 The total demand for cattle meat and ham remains fixed in a fixed market.
 Cattle Meat and Ham are close substitutes and consumer tastes and preferences are
substantially biased towards a preference for ham.
 There are no competing firms or ranches in the market other than Swine Company and
the cattle ranch).
The result of increased demand may be an increase in the price of the ham.
Diagram 2 Cross Elasticity between products (ham) of Swine Company and products of
cattle ranch.
Source: Prepared by Author

Question 3
It is reasonable to state the Company has a monopoly in the market, since the question states that
the Company has acquired the patent and there is no mention of a competing generic drug so far
in the market. The imposition of tax will increase the cost of the vaccine. Therefore, if the cost of
the vaccine to the Amazing Institute were $1, then the new cost of the vaccine would be
$1.25.
The company operates as a monopoly in the market and in a monopoly, the firm is a price maker
and can charge abnormal profits. In such a situation, the price would, generally, be transferred to
the consumers or buyers of the vaccine (assuming there are no legal issues that prevent the
Company from increasing the price of the vaccine.) In such a case, the consumers may end up
paying up to 25% more for the vaccine as an effect of the additional tax. This may sometimes,
result in some buyers being priced out due to lack of affordability.
Diagram 3 Profits accrued by Amazing Institute.
Source: Prepared by Author. Adapted from Samuelson and NordHaus, 2004

Diagram 4 Effect of taxes of Prices. Total Output may shift slightly towards left to Q2
Source: Prepared by Author. Adapted from Samuelson and NordHaus, 2004
Question 4
The assumption made here is that no other dress from the line of production is being produced.
The Total revenues for each order would be $600 X 5 = $3000 (Samuelson & NordHaus, 2004)
Total Cost 0f Producing each Set = 5 (Total Cost of Red Velvet Cloth + Total Cost of Pearl
Buttons)
Total Cost 0f Producing each Set = 5 (200 +100)
Total Cost 0f Producing each Set = 5 X 300
Total Cost 0f Producing each Set = $1500

Total Profits for each set = Total Revenues – Total Cost = $ 3000 – 5 ($200 +$100)
= $ 3000 – 1500
= $ 1500
Profits are maximized when the total production capacity is utilized.(Samuelson & NordHaus,
2004) Here, the production capacity is limited by the amount that can be paid to acquire the
goods. Hence, the total production capacity is limited to 6000/1500 = 4. (Assuming there are no
other constraints and that there are constant returns to scale). The total production capacity is 4
sets.
Hence, the total maximum profit that can be accrues is $1500 X 4 =$ 6000.
Bibliography
Chauhan, S. (2009). MICROECONOMICS: Theory and Applications, Part 1. New Delhi: PHI
Learning PVT. Ltd.
Samuelson, P. A., & NordHaus, W. R. (2004). Economics: Seventeenth Edition. New Delhi:
Tata- McGraw Hill Publishing Company.