Microeconomic Analysis Assignment: Economic Principles

This assignment provides a detailed analysis of microeconomic concepts. It begins by examining the impact of tariffs on market equilibrium, including producer surplus and deadweight loss. The solution then explores different market structures, such as perfect competition, analyzing demand c...Read More

MICROECONOMIC ANALYSIS

Table of contents
Question 1:.................................................................................................................................3
Question 2:.................................................................................................................................4
Question 3:.................................................................................................................................4
Question 4:.................................................................................................................................6
Question 5:.................................................................................................................................6
Question 6:.................................................................................................................................7
Question 7:.................................................................................................................................9
Question 8:...............................................................................................................................10
Question 9:...............................................................................................................................11
Reference list............................................................................................................................12

Question 1:
a.
In this graph, the point of intersection is the equilibrium price.
b. The tariff that has been imposed on the radio can increase the producer surplus to
the extent of the increase in the amount of quantity supplied in excess of demand.
If the producers would increase the amount of quantity supplied to a great extent
then they would have to pay more tariff (Friedman, 2017, p.31).
c. The government would collect the amount of tariff which is equal to the tariff on
one domestic fan and the numbers of fans sold by the producers. The Deadweight
loss is the amount of loss of tariff arising out of the improper allocation of
resources.
d. If the government had used a quota then it would be able to earn tariff revenue on
the quota of the sale of domestic fans by a producer (Posner, 2014).
Question 2:
a. A perfectly competition is a type of competition where there are unlimited buyers and
sellers selling products which are completely same with each other (Azevedo &
Gottlieb, 2017, p.67).
Assumptions
A large number of buyers and sellers- In a perfectly competitive market there are a large
number of buyers and sellers.
Full knowledge- Each and every buyer and seller have full knowledge regarding the price
and nature of the products.

Fully homogenous products- Products sold by all the firms are fully same.
Free entry and exit- Existing firms can leave the industry and new firms can join the
industry at their own will.
b. Demand curve in the perfectly competitive market is fully horizontal or perfectly
elastic because the products are all same. Besides, buyers have full information
(Kirzner, 2015). Suppose a seller increases the price of his product slightly the buyers
would immediately move to other sellers. This shows that the firms are price takers.
c. In perfect competition, the demand curve of an individual firm is perfectly horizontal.
Irrespective of the quantity produced by the firm in a perfectly competitive market,
the price is the same, so the price is equal to MR.
Question 3:
a. The short-run supply curves are perfectly related to the short run marginal cost
curves. In short run, the Marginal cost curve cuts the average variable cost curve and
the average total cost curve in the middle (Varian, 2014). The point of intersection is
expanded and plotted on another graph showing the market supply curve in the short
Run.
b. The long-run market supply curve is referred to as the sum total of the individual
firm's supply curve. This is the degree of response of the short run supply in a market
when there is a change in the demand. Figures A and B explain different supply
curves. Demand curves are shown by D1 and D2 and the supply curves are depicted
as S1 and S2. The point whereof the intersection of D1 and S1 shows that the market
undergoes an equibrillium of a long run (Varian, 2014). When D1 to D2 increases the

market price goes up to P2. The firms in short run earn economic profits. In the long
run, there would be the entry of new firms which would tend the short-run market
supply change.
Picture B shows both the demand and supply curves for the industry. There is an
increase in production and level of output. From the Price P1, any increase in demand
an increase in demand will cause the market price move to P2. Firms are able to earn
economic profits in short run but in long run, there would be new firms coming in and
short-run supply moves from S1 to S2.
Question 4:
a. Chart of Opportunity costs
Country Snow Country Ice
Opportunity costs Skis and Snow, Boards Opportunity costs Skids and Snow Boards
Opportunity cost- 10 Skis Opportunity cost 5 Snowboards
Country Snow is producing more snowboards so regarding Snowboards, Country Ice has the
advantage. Regarding the production of no country is having a comparative advantage
because both the countries have produced a similar number of Skis.
As per as absolute advantage is concerned Country Ice gets the advantage of producing more
skis as it produces a less number of Snowboards. In case of Boards country, Snow gets the
absolute advantage as it produces more skis.
b. The results of trade state that the citizens of Country Snow and Country Ice are getting
a similar amount of Skis but regarding snowboards, it is seen that the citizens of

country Ice are getting less of snowboards (Shapiro, 2016). This is because the number
of snowboards produced is more in country Snow and less in country Ice (Kurzban et
al. 2013, p.661).
Question 5:
a. In case of a closed economy, there is no trade conducted with the other countries. So
if the CCC land remains a closed economy then the equilibrium price would be
considered by the price determined by the amount of quantity demanded by domestic
customers and the amount of coffee supplied by CCC land within the domestic
territory (Posner, 2014).
b. If the status of CCC land is changed from a closed economy to an open economy then
the CCC land would import and export coffee because in case of an open economy
trade can be conducted with outside economies. Hence CCC land can import and
export coffee.
c. When CCC land is in a closed economy the consumer surplus is the difference
between the amount which the domestic consumers decide to pay and the actual
amount that the domestic consumers have paid. When CCC land is in an open
economy the consumer surplus is the difference between the amount which the
domestic and foreign consumers decide to pay and the actual amount that the
domestic and foreign consumers have paid. No, domestic consumers would not be in
favour in opening the trade market because this would increase the supply and if
supply increases then a price of coffee of CCC land would also increase (Posner,
2014).
d. The tariff needs to be as big as the number of imports.
e. In this case, the amount of tariff charged should be equal to the amount of reduction
of imports because the reduction in imports can reduce foreign revenue. In such a
case the government of CCC land will have to raise tariff similar to that extent in
order to reach their revenue maximisation goal.
f. The amount of money received from tariff which has not been properly allocated to
the coffee business is the deadweight loss.

Question 6:
a. Marginal cost curve Demand curve
b. Marginal Revenue
c.

Profit maximising price and quantity
In this graph the shaded region represents the price P1 is the profit maximising price and
quantity Q1 is the profit maximising quantity.
d. In this case, the profit is the difference between the Marginal revenue and the
marginal cost.
e. Consumer surplus is referred to as the level where the consumer is already satisfied
after the purchase of the commodity. The profit-maximizing quantity of output is the
level of output in which the firm is able to earn the maximum profit.
f. A deficit which results from improper allocation the resources properly states that
deadweight loss (Varian, 2014). For instance, price ceilings, and other controls create
deadweight loss
Distributional effects of monopoly are
No economic growth - In case of monopoly the entry of others is so the market does not
face growth.
Inequality of amount of goods and services available with different persons- Due to
monopoly the low-income groups are not able to get proper services because the sellers
can charge any high price at any point of time (Varian, 2014). Customers cannot move to
other sellers as there is only one seller.
Question 7:
a. Characteristics of monopolistic competition

 Numerous buyers and sellers- In case of Monopolistic competition there are
a large number of buyers and sellers. The firms in the industry have the power
to control their price and their output levels.
 Highly distinguishable products- Products that are sold by the firms in the
monopolistic market are different but they are close substitutes for each other
(Kirzner, 2015). The products may have slight differences in terms of colour,
design but they are the same.
 No barriers regarding entry and exit- In case of the monopolistic market
there are any barriers regarding entry and exit.
 Huge selling costs- In case of monopolistic competition, the firms sell the
huge amount of costs on advertisements (Kirzner, 2015).
 Actual knowledge not available- Buyers and the seller's do not have full
knowledge of the products. This is because there are a large number of
substitutes.
 Negatively sloping demand curve- The demand curve of a perfectly elastic
market is negatively sloping.
b. Firms in monopolistic competition competitors with price and non-price policy.
Sometimes they try to decrease their price and sell their products in order to compete
with other firms (Kirzner, 2015). On the other hand, they also adopt non-price
policies which include giving guarantees and assured gifts on purchases.
c. In the perfectly competitive market, the firms have less efficiency because they
cannot change their price and earn profits which are possible in case of monopolistic
competition.
In terms of efficiency the monopolistic market is more profit because they can reduce
their price and get a large amount of sale whereas in perfect competition they are not
able to earn huge abnormal profits or excess capacity profits in the long run by
reducing price and selling in huge amount because all the products are fully same
(Qadir et al. 2014, p.282). On the other hand in case of perfect competition, the firms
are price takers. Price remains the same irrespective of the level of output or
production which does not occur in case of monopolistic competition.

Question 8:
a. The graph shows a firm in the perfectly competitive market. This can be told because
the Marginal revenue is equal to the price. In perfect competition MR=P because of
the gets the same price whichever quantity it sells.
b. In case of short-run production, the perfectly competitive firm can make positive
economic profits. This is because the point of output which is intersected marginal
cost equalises with the amount of marginal revenue which is equal to price (Nomidis,
2016). As the firm is able to cover the price of the product the firm would not be in a
position to earn abnormal profits or profits in excess. In the short run, the firm would
produce the quantity of output which would cover the normal profits.
c. In case of long run, the firm can decide about the amount of output according to the
price which can cover normal profits. The forces of demand and supply can affect the
situation of the long run equilibrium (Negishi, 2014, p.9). In the long, the whole of
the Q would be sold at the price or P that prevails. There is free entry and exit in the
long run and all the other firms would cover only normal profits.
Question 9:
a. To differentiable features of Oligopoly are:
Free entry and exit- In case of Oligopoly, there is tough competition among the firms. Old
firms can easily move out of the industry if they are not able to survive in the competition
and the new firms can enter the industry to compete with member firms.
Firms dependent on each other- Firms in Oligopoly market are dependent on each other
regarding the business decisions that they take. For instance, if one firm adopts the policy of
effective advertisement then the other firms immediately follows it.
b. Firms in Oligopoly are interdependent to each other because there are many sellers
that are able to capture the market and want to face cut-throat competition with each
other (Whisenant & Willenborg, 2016). Each firm wants to dominate the other. They
often follow each other and the firms in an Oligopoly market adopt the policy of
competition with each other not with the price but with respect to other aspects.
c. Prisoners Dilemma is referred to as the paradox that is related to decision making. In
this case, there is a conflict in the decision between two persons even if the decisions
are for their interests. Prisoner's dilemma is known as the game theory. This

explanation is related to Oligopoly because business firms in an Oligopoly
competition undertake certain decisions but they are not sure about the actions that
their competitors would take if they would execute their decision (Ishii & Zhang,
2017, p.513). The concept of prisoner's dilemma establishes the idea of the selfish
behaviour of rival firms contrary to the best outcomes for both the firms.

Reference list
Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse
selection. Econometrica, 85(1), 67-105.
Friedman, M., (2017). The quantity theory of money (pp. 1-31). Palgrave Macmillan UK.
Ishii, J., & Zhang, D. H. (2017). Options compensation as a commitment mechanism in
oligopoly competition. Managerial and Decision Economics, 38(4), 513-525.
Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago Press.
Kurzban, R., Duckworth, A., Kable, J. W., & Myers, J. (2013). An opportunity cost model of
subjective effort and task performance. Behavioral and Brain Sciences, 36(6), 661-679.
Negishi, T. (2014). Firms and Production. In Elements of Neo-Walrasian Economics (pp. 9-
27). Springer Japan.
Nomidis, D. (2016). A Revision of the Theory of Perfect Competition and of Value.
Posner, R.A., (2014). Economic analysis of law. Wolters Kluwer Law & Business.
Qadir, M., Quillérou, E., Nangia, V., Murtaza, G., Singh, M., Thomas, R. J., ... & Noble, A.
D. (2014, November). Economics of salt‐induced land degradation and restoration.
In Natural Resources Forum (Vol. 38, No. 4, pp. 282-295).
Shapiro, M. D. (2016). Supply shocks in macroeconomics (pp. 1-7). Palgrave Macmillan UK.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth
International Student Edition. WW Norton & Company.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth
International Student Edition. WW Norton & Company.
Whisenant, S., & Willenborg, M. (2016). Price Competition Within the Large Audit Firm
Oligopoly: A Panel Data Analysis of Initial Engagements.