BECN 100 Microeconomics: Impact of Excise Tax and Market Analysis

This microeconomics assignment explores various key concepts, starting with the impact of excise tax on soft drinks and cigarettes in the UAE, including its effects on price, demand, and government revenue. It analyzes the price elasticity of demand for Coca-Cola, Monster energy drink, and Chesterfield cigarettes based on survey data collected at Happy Grocery stores. The assignment also discusses utility maximization with respect to movie and popcorn consumption, illustrating the law of diminishing marginal utility. Furthermore, it distinguishes between explicit and implicit costs, short-run and long-run production, economies and diseconomies of scale, and sunk costs. Finally, it examines different market structures, including perfect competition, monopolistic competition, oligopoly, and monopoly, providing examples from the UAE, and discusses pricing strategies for firms in perfectly competitive markets. Desklib offers a wealth of resources, including similar solved assignments and past papers, to aid students in their studies.

Running head: ECONOMICS 1
Economics
Professor’s Name
Institution Affiliation
Date

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ECONOMICS
1. The Federal Tax Authority cautioned traders not to stock up soft drinks and cigarettes
since they will have to prove payment of tax on stocked goods after excise tax is introduced.
Excise tax will have an impact of increasing the prices of drinks and cigarettes. In regards, with
the specific UAE excise tax situation, the prices increased by 50%.
Traders who stock up their goods before excise duty is implemented are motivated by the
urge to take advantage of the lower prices prior to tax. This implies that such traders might not
purchase stock in the near future and hence will have denied the government of tax revenue.
With the introduction of excise duty, traders will have to hike the prices of drinks and cigarettes
so as to get a profit. Stock up will have an impact of lowering the equilibrium price and
increasing equilibrium quantity from that which could have existed due to introduction of the
tax.
2. The survey was conducted at Happy Grocery stores to establish the impact of the excise
tax effected by the UAE Federal Tax Authority at 1 st October 2017. In the survey, the
enumerators interviewed the selected traders their selling prices of Coca cola 300ml carbonated
drink and the demand of the product before and after the excise duty was effected. From the
study, it was found that Coca-Cola 300 ml retailed at 1.08 Dh before the tax and 1.62 Dh after
the excise tax while the demand declined from an average of 240 Units per day to 200 units. The
price of Chester field red tobacco brand retailed at 2.1 Dh prior and 4.2Dh after the tax while its

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demand remained constant at 200 pieces per day. Monster energy drink also increased from 5.5
Dh to 11 Dh while its demand declined from 400 units to 300 units.
Formula= Percentage change∈quantity demanded
Percentage change ∈ price
Product Price change (%) Demand change (%) Elasticity
Coca cola drink 50 -16.67 -0.333
Monster energy drink 100 -25 -0.25
Chester field red
tobacco
100 0 0
Chester field cigarettes are price inelastic and therefore, despite of the change in price from
2.1Dh to 4.2Dh, the quantity demanded remained constant at 200 pieces @ day. The product is
an addictive product whose consumers purchase regardless of retailing price. Coca-Cola 300 ml
soda is a luxury good with a price elasticity of -0.333. The increase in its price from 1.08Dh to
1.62Dh in response to the excise duty caused a decline in its demand from 240 units to 200 units
per day since consumers could postpone its consumption in favor of necessary goods. Monster
energy drink is also price elastic (+0.25) and hence its price increase from 5.5Dh to 11Dh caused
a decline in the quantity demanded. From the findings, the coca cola brand quantity decreased
most because it has the highest price sensitivity as indicated by the high elasticity of demand of -
0.333 since the product is a luxury good.

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3.
Amount per week Total Utility for movie Total Utility for Popcorn
0 0 0
1 150 50
2 210 60
3 240 70
4 300 80
Utility is the amount of satisfaction generated from consuming a certain product. The total utility
curve of the group member is illustrated below.

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From the total utility curve below, it is evident that as the group member consumes more of the
popcorns, his utility rises up to a point of diminishing utility. However, his consumption for
movies rises continuously. The consumption of popcorns satisfies the law of diminishing
marginal utility. Conversely, the consumption of movies des not satisfy the law of diminishing
marginal utility. This is because movies are luxury goods while popcorns are normal goods. 75
popcorns will maximize his utility while it cannot be determined from the available information
the number of movies that would maximize his utility since the graph has not reached its
maxima.
4. In economics it’s important to calculate the monetary cost of production processes.
Explicit costs is the monetary cost attached to factors of production. They are incurred when
firms pay for using factors of production such as labor, capital, and land. Implicit costs are direct
losses that arise from the use of factors of production (Ehrenberg & Smith, 2016).Unlike, explicit

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costs, implicit costs such as depreciation are not paid for in form of money although have a
monetary value.
The distinction between short run and long run in economics arise from the presence and lack of
fixed and variable costs. In the short run, both fixed and variable costs exists in the production
process while in the long run, there exist no fixed costs.
The U-shape of the LRATC curve occurs when minimum efficient scale is the amount of output
which attained when the LRAC curve is at its minima. The diagram below shows the U-shaped
LRAC curve. The increase in the size of the plant causes an increase in average production cost
resulting to a decline in economies of scale. The Curve takes appositive gradient when returns
decrease to scale as result of dis-economies of scale.
The law of diminishing returns arises since each successive unit of the variable factors of
production has less of the fixed factor to work with. It states if one input of production is
increased while other inputs are held constant, a level will be reached where additional input will
lead to diminishing increases (Miller & Benjamin, 2017).
Sunk costs are past costs that cannot be controlled anymore. For example the rent paid in the
previous month is a sunk which is irreverent for decision making.
Market structures define how the market of various goods and services are organized. A
perfectly competitive market is a market where firms sell identical products. The market is

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characterized by free entry and exit and high competition for customers. Among the existing
firms, none has significant power over the rest. In the United Arab Emirates, the agricultural
sector is an example of a perfectly competitive market.
Monopolistic competition market is a market characterized many small companies that compete
against each other (Wooldridge, 2015). However, they trade on similar goods which are slightly
differentiated. The companies compete against each other based on differentiation in product
features and prices
Oligopoly market structure is a market characterized by few but large firms which are price
takers. The goods and services offered are close substitutes of each while firms cannot wage
price-based competition against each other. The firms also make super normal profits at both
short run and long run. In UAE, telecommunications sector in a noticeable example of an
oligopoly market.
Monopolistic market structure is a market place where there is only a single firm. In this market,
the barriers to entry are high, buyers are price takers, and competition is low. This market is
common for government controlled sectors of the economy. In UAE, the Emirates National Oil
Company, the sole supplier of oil, fuel, and petroleum is a monopolistic firm.
5. A single firm in a perfectly competitive market would choose to set the price equal to the
market price as a strategy for obtaining customers. The market is characterized by many firms
offering similar products making competition high (Farronato & Fradkin, 2015). The companies
therefore are forced to price their products at the market price in order to benefit from normal
profits. If the products are sold at a price higher than the market price, the product will not sell
since buyers will prefer buying from other firms. The single firm in a perfectly competitive
market is a price taker because sellers are many and buyers seek to maximize their utility by

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buying at lower prices. If a firm sets its price below the market price, the firm will risk going in
to a loss since the selling price might not cover the production cost.
References
Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy.
Routledge.
Farronato, C., & Fradkin, A. (2015). Market structure with the entry of peer-to-peer platforms:
The case of hotels and Airbnb. Work. Pap., Stanford Univ.
Miller, R. L., & Benjamin, D. K. (2017). Economics of macro issues. Pearson..
Wooldridge, J. M. (2015). Introductory econometrics: A modern approach. Nelson Education.