Foundations of Microeconomics - Assignment Example

Microeconomics al Affiliation) Question One P S* SP*pe D0 q* qe qAt an equilibrium state, the number of dates in the market would be qe while the price would be pe. The hurricane destroys 50% of productive date plantations shrinking the market supply of dates. As a result, the supply curve shifts inwards to the left from s to s*. Consequently, the number of dates in the market reduce from qe to q* while the price increases from pe to p*.

The effects on the equilibrium price and quantity are unambiguous.Question Twoa) Price elasticity = 0.5. This means that demand for cigarettes falls by 0.5% for every 1% price increase. However, the government wants to reduce the consumption of cigarettes by 25%.Therefore, the government would have to increase the price of cigarettes by (25/0.5) =50%. The government should increase the price of Cigarettes by (0.5*10) = 5 Dirhams.b) The policy will have a larger effect on smoking 1 year from now.

Since the price elasticity is high, the demand for Cigarettes will fall sharply in response to the price increases.c) Teenagers’ demand is more price elastic than adults’ demand because most teenagers are new users of Cigarettes and any price increase would discourage non-users from smoking and encourage users to quit. On the other hand, adult users are mostly addicts and as such, adults’ demand is less price elastic compared to teenagers’ demand.Question Threea) It is incorrect that a tax that does not have a deadweight loss cannot raise any revenue for the government.

When the demand of a good is perfectly inelastic, a tax would have no effect on the quantity or any deadweight loss. However, the tax would still raise revenue for the government.Illustration P S* SeP d0 q* qe qIn the graph above, the demand curve is perfectly inelastic. An introduction of tax shifts the supply curve inwards from Se to S*.

The quantity supplied reduces from qe to q*. However, the price remains constant. In such a case where the demand of a good is perfectly inelastic, there is no deadweight loss yet the government is still able to raise revenue through taxation.b) It is incorrect that a tax that raises no revenue for the government cannot have any deadweight loss. When the government imposes a 100% tax on goods, sellers will not supply any of the good and the tax will raise no revenue. However, the tax has a large deadweight loss as it reduces the quantity sold to zero.

P Deadweight Loss D QWhen the government imposes a 100% tax on a good, there will be no supply of that good and the supply curve will be equal to the price axis. The tax will not raise any revenue for the government and it will have a large deadweight loss as shown in the figure above.Question Foura) Opportunity Costb) Average Costc) Fixed Costd) Variable Coste) Total Costsf) Marginal Costg) Average Variable Cost