Microeconomics Assignment on Market Equilibrium and Firm Behavior

This microeconomics assignment explores various concepts including firm behavior in different market structures, the impact of shifts in supply and demand on market equilibrium, and the characteristics of public goods. The assignment analyzes cost curves, profit maximization strategies for firms in both perfect and imperfect competition, and the effects of increasing, decreasing, and constant cost industries on long-run supply. It also examines how changes in the prices of related goods (substitutes and complements) affect the equilibrium price and quantity in the margarine market. Furthermore, the assignment discusses the short-run equilibrium of a monopolistic firm and the impact of substitute availability on its demand curve. Finally, it analyzes the effects of oil price changes on related markets like automobiles, home insulation, and tires, and explains why public goods are typically provided by the government rather than private firms, highlighting the challenges of privatization and the importance of marginal benefit equaling marginal cost for efficient provision. Desklib provides this solution and many other resources to aid students in their studies.

Running head: MICROECONOMICS ASSIGNMENT
Microeconomic Assignment
Name of the Student
Name of the University
Author Note

1MICROECONOMICS ASSIGNMENT
Answer to Question 3
(A)
Firm A
AR= undefined, 10, 10, 10, 10, 10, 10
MR= 10, 10, 10, 10, 10, 10
MC= 12, 8, 10, 16, 24, 40
AC= undefined, 42, 25, 20, 19, 20, 26.6
Firm B
AC= INFINITE, 134, 77, 59, 54, 53.2, 61
MC= 34, 20, 23, 39, 50, 100
MR= 130, 110, 90, 70, 50, 30, 20
(B)
Firm A= operating in short-run
Firm B= operating in short-run
(C)
Firm A= perfect competition
Firm B= imperfect competition
(D)
Firm A= output level is 3

2MICROECONOMICS ASSIGNMENT
Firm B= output level is 5
(E)
Firm A= The minimum of average cost curve (19,4) is above the profit maximisation point
(50,3). Thus, the firm will incur losses.
Firm B= The firm is also making supernormal profits in the short run.

3MICROECONOMICS ASSIGNMENT
Answer to Question 6
(A)
(Rubinfeld and Pindyck 2013)
Suppose for some exogenous reason, the demand curve increases from D1 to D2. This
will increase prices from P1 to P2. As prices increases, the profits incurring to the firms also
increases. This will lead to the entry of new firms. As there exists constant cost structure, the
cost curves will not shift. The entry of the new firms will lead to increase in supply from S1
to S2. This entry will occur until there in zero profits in the industry. Therefore, Prices
remains same and the industry output increases to Q2. The long run curve is fully elastic in
nature.
(B)
The case of increasing cost is quite different from the constant cost industry. Suppose
because of some external factor the demand in the market increases from D1 to D2. Because
of this, prices increases from P1 to P2. Thus, existing firm now enjoys supernormal profit.
This will lead to entry of new firms in the industry. Because of the increasing cost structure

4MICROECONOMICS ASSIGNMENT
of the industry, the entry of new firms will lead to increase or shift of the long-run average
cost curve. The marginal cost curve also shifts from SMC1 to SMC2. Therefore, the new
competitive equilibrium will shift to a point where prices are P3. The existing firms might
leave due to the increased costs. Therefore, the supply will increase from S1 to S2. The
equilibrium point shifts from A to B. The long-run supply curve in this case is upwards
sloping in nature dented by SL.
(Rubinfeld and Pindyck 2013)
(C)
In case of decreasing cost industry, entry of new firms will lead to a decrease in the
cost structure of the industry. Suppose that the demand curve shifts from D to D1 because of
this, there will be increase in the prices and the quantity demanded. The prices will increase
from P to P1. The existing firm will now earn a super normal profit. This will lead of new
firms in the market. However, as the cost structure suggests, entry of new firms will lead to a
decrease on the long –run average cost from LAC to LAC1. The profit maximising
equilibrium will shift from P to P2. Thus, the level of profit increases. This increases the
entry of the new firms shifting the supply curve more from than the demand from S to S1.

5MICROECONOMICS ASSIGNMENT
The equilibrium point shifts E to E1. Thus, the long-run supply curve of the industry is
downwards sloping.
(Varian 2014)

6MICROECONOMICS ASSIGNMENT
Answer to Question 7
(A)
As the prices of margarine increases there is an upwards shift of the supply curve, which will
lead to increase in prices and decrease in the quantity.
(b)
Yoghurt and margarine are substitutes to each other; therefore, a rise in the demand
for yoghurt will lead to a decrease in the demand for margarine, thus reducing equilibrium
price and quantity.
Price
Quantity
P
Q
P
Q
1
S
S1
D
Price
Quantity
DD1
S
P
Q
p
q

7MICROECONOMICS ASSIGNMENT
Price
Quantity
SDd
P
Qq
p
S
D
d
Quantity
Price
p
P
Q q
(C)
Bread and margarine are complementary to each other. Therefore, an increase in the
price of the bread will lead to decease in the demand for bread and thus will lead to decrease
in the demand for margarine therefore, reducing equilibrium price and quantity.
(D)

8MICROECONOMICS ASSIGNMENT
S
Dd
Quantity
Price
P
Qq
p
As the demand for bread increases the demand for margarine also increasing the
equilibrium price and quantity.
(E)
Butter and margarine are substitutes to each other. Rise in the expected price of butter
will shift the supply curve for butter, thus, increasing prices and reducing quantity for butter.
Because of this, the demand for margarine will increase which will and the equilibrium price
and quantity will increase.
(F)
An increase in taxes will shift the supply curve for butter upwards, thus reducing the
equilibrium quantity demanded and price. As butter and margarine are substitutes to each
other, the demand for margarine will increase. Thus, increasing the equilibrium price and
quantity.

9MICROECONOMICS ASSIGNMENT
S
Dd
Quantity
Price
P
Qq
p
Price
Quantity
SDd
P
Qq
p
(G)
A technological advancement will lead to increase in the supply of butter. As the supply
curve shifts to the right, the equilibrium price decreases and the quantity increases for butter.
This will lead to decrease in the demand for margarine and thus reducing the equilibrium
price and quantity.

10MICROECONOMICS ASSIGNMENT
Answer to Question 8
(A)
Curve 1= Marginal Cost
Curve 2= Average Cost
Curve 3= Demand curve
Curve 4= marginal revenue curve
(B)
The diagram shows the short- run equilibrium as in the long- run the profits earned by
a monopolistic firm is zero.
(C)
P3 is not the long -run equilibrium because in the long- run P3 is a point in the
upwards sloping portion of the average total cost. Thus, it is not feasible.
(D) P6 and Q1 are the profit maximising equilibrium points in the short run
(E)

11MICROECONOMICS ASSIGNMENT
(F)
The effective demand curve will shift downward as shown the figure below.
NEW ARNEW MR

12MICROECONOMICS ASSIGNMENT
Price
Quantity
SDd
P
Qq
p
(G)
In the long-run the demand curve shifts downwards because of the availability of
close substitutes. The profit maximisation criteria holds, where marginal revenue is equal to
marginal cost. The firms operate in the downwards sloping portion of the average cost curve.
MR= MC and AR=AC in the long -run.
Answer to Question 9
(A)
(1)
Oil and automobiles are complementary to each other. Therefore, a rise in the price of
oil will lead to fall in the quantity demanded for automobiles thus, reducing price and
quantity.
(2)

13MICROECONOMICS ASSIGNMENT
Price
Quantity
SDd
P
Qq
p
S
D
d
Quantity
Price
p
P
Q q
Home insulations operate on gas. Thus, increase in price will lead to fall in demand of home
insulators.
(3)
Coal and oil are substitutes of each other therefore an increase in price will lead to
increase in demand for coal and thus increasing the equilibrium output and price.
(4)

14MICROECONOMICS ASSIGNMENT
Price
Quantity
SDd
P
Qq
p
S
D
d
Quantity
Price
p
P
Q q
Automobile and tyres are complementary to each other. Therefore, a rise in the oil
price will lead to a fall in the demand of automobiles and thus, reducing the wear and tear of
tyres. Therefore, reducing the demand for tyres.
(5)
Bicycles and automobile are substitute, so there will be an increase in demand for
bicycles.
(B)

15MICROECONOMICS ASSIGNMENT
Public goods are those goods, which are provided to every individual in a society, and
nobody can be excluded from rendering the services of these products. In most of the
economies, government is the provider of such public goods (Brim 2017). For example, think
of the police protection that is enjoyed by every citizen of a country. Instead of the
government if the private firms were to provide this service, then the firm would need to
identify the individuals who are using these services. Private firms are often engage in
maximising their profits unlike that of the public sector firms. Moreover, the private firms
must have perfect knowledge of the quantity of police protection that is consumed by every
individual. Further, the firm will also have to assess and keep a record of those individuals
who are not rendering these services. Because of all these issues there may exist,
inefficiencies related to the privatisation of public goods. In order to maximize efficiency the
production of the public goods must occur at the point where marginal benefit equals the
marginal cost. Therefore, the cost of providing some additional service is zero. This
phenomenon cannot be achieved by a private firm whose main concern is to maximize the
own profit.

16MICROECONOMICS ASSIGNMENT
References
Brim, O., 2017. The economic theory of representative government. Routledge.
Rubinfeld, D. and Pindyck, R., 2013. Microeconomics. Pearson Education.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.