Microeconomic Analysis - The Effectiveness of Supposedly Ineffective Price Constraints - Assignment Example

a. Considering a situation prior to a ban on cigarette smoking Student who smoke on campus A student who smokes on the campus has a preference for cigarette and would be willing to give up food for consuming more cigarette thereby resulting in a marginal rate of substitution towards the product (Pindyck and Rubinfeld, 2013). If we plot cigarette on the vertical axis and food on the horizontal axis the graph appears as The above graph shows a preference towards cigarette where the marginal rate of substitution is increasing towards the consumption of cigarette and prefers to substitute it for food (Garrison, 2005). Students who don’t smoke on campus A student who doesn’t smoke on campus has a preference towards food and is willing to give up cigarette for consuming more food. This demonstrates the fact that the more food the person has the more cigarette can be given up. This helps to present the fact that the indifference curve has a diminishing marginal rate of substitution (Pindyck and Rubinfeld, 2013). If we plot cigarette on the vertical axis and food on the horizontal axis the graph appears as The above graph clearly demonstrates the preference towards food and the student is willing to substitute the same in place of cigarette resulting in a diminishing marginal rate of substitution which preference increases towards food. b. Considering a situation after a ban on cigarette smoking Student who smoke on campus A student who smokes on campus will have a preference for cigarette despite banning it on the campus. Since, the satisfaction for the student will increase if more cigarettes is provided compared to food which would mean that the marginal utility from consuming one cigarette will be more than the marginal rate while consuming food (Pindyck and Rubinfeld, 2013). If we plot cigarette on the vertical axis and food on the horizontal axis the graph appears as The above graph highlight a situation where a ban on cigarette increases its marginal utility and multiplies the satisfaction that people receives from consuming it (Shepherd, 2006). This thereby results in a situation where indifference curve is represented through a straight line where the preference towards cigarette has increased the marginal utility of it. Students who don’t smoke on campus A student who doesn’t smoke on campus will have an indifferent attitude whether smoking is permitted or not. Since, the student has no preference for cigarette and doesn’t look to substitute food for any product so his marginal utility remains the same (Pindyck and Rubinfeld, 2013). If we plot cigarette on the vertical axis and food on the horizontal axis the graph appears as The above graph clearly highlights the manner in which the marginal utility remains the same because the student doesn’t prefer to substitute food. The satisfaction depends on the quantity of food he has thereby resulting in the same marginal utility from the consumption of another food resulting the preference to be towards food. c. The marginal rate of substitution for both cigarette and food is the same as both have been priced for $1 so substituting one for other would mean the same utility. This situation is prevalent when there is no ban on smoking and cigarette is easily available. Imposing a ban on cigarette would mean it won’t be available. This would thereby increase the cost and marginal utility derived from it but the change to what degree will depend on the amount of food one student is willing to trade or substitute for cigarette (Mayerhoefer & Zuvekas, 2008). This will have an impact on the utility function and would make people to substitute more food for cigarette. This is shown in the graph below The above chart shows same marginal rate of substitution which will thereby have the same satisfaction level and will make people consume the same product and services again and again. This will thereby result in no change in the marginal rate of substitution. The change in the case can be seen by the additional preference which students have towards cigarette which will thereby multiply their utility function. This will result in people having a preference towards food to be better off as the process would entail to a situation where trading in food for cigarette improves the marginal utility and satisfaction level leading towards a shift and preference (Pindyck and Rubinfeld, 2013). Thus, students having food are better off but the degree to which they will be better off will depend on the manner in which the preference and utility function changes. d. Considering different situations where apart from ban if other methods would have been seen the impact it would have created i. Campaign on the harmful effects of tobacco A campaign on the harmful effect of tobacco will have minimum impact on the marginal utility of both cigarette and food as no change in price will have no impact on the marginal rate of substitution. This will thereby make people to consume cigarette and food in the same manner (Pindyck and Rubinfeld, 2013). The only change could be seen through a shift in the indifference curve as certain section of the students might stop consuming cigarette but since the price doesn’t change so the slope of the curve won’t change and will result in having the same utility function. This will thereby have no or little impact on the marginal utility and overall satisfaction resulting no change in the indifference curve (Garg, 2010). The graph is as The above chart shows that a campaign will have no impact as students favoring cigarette and food will continue consumption in the same manner thereby having no impact on the indifference curve as the marginal rate of substitution is zero ii. Increase in price of tobacco Increasing the price of tobacco will have a change on the marginal utility which will be derived from consuming both cigarette and food. A change in price will also change the marginal rate of substitution and will increase the preference towards the consumption of food. Since, increasing the price would mean that substituting cigarette in place of food will become expensive and will thereby tend to reduce the utility derived from it. People dealing in food will be better to trade off and will have an impact on the overall demand as the demand for cigarette will reduce as the marginal utility and satisfaction from the consumption of cigarette will increase (Boyes & Melvin, 2008). The graph is as The above graph shows that the preference towards food will increase as the change in the price of tobacco makes certain section of the society to give it up and start consuming more of food as the satisfaction derived from food increases thereby changing the preference towards food (Cottle & Wallace, 2005). iii. Reduce the price of food Reducing the price of food will have a change on the marginal utility which will be derived from consuming both cigarette and food. A change in price will also change the marginal rate of substitution and will increase the preference towards the consumption of cigarette. Since, decreasing the price would mean that substituting food in place of cigarette will become cheaper and will thereby tend to reduce the utility derived from it (Pindyck and Rubinfeld, 2013). People dealing in cigarette will be better to trade off and will have an impact on the overall demand as the demand for cigarette will rise as the marginal utility and satisfaction from the consumption of cigarette will increase. This is aided by the fact that the marginal utility which is derived from the consumption of food decreases thereby having an impact on the marginal rate of substitution (Colell, Winston, Michael & Jerry, 1995). The graphical representation is as The above graph shows that a reduction in the price of food will make people substitute food for cigarette and will thereby tend to increase the satisfaction derived from consumption of cigarette. This will thereby tend people to increase the consumption of cigarette. References Boyes, W. & Melvin, M. (2008). Macro economics. 7th edition, Houghton Mifflin Company Colell, M., Winston, A., Michael, D. & Jerry, R. (1995). Microeconomic Theory. 3r Edition, New York, Oxford University Press, Pearson Education Cottle, R. & Wallace, M. (2005). The effectiveness of supposedly ineffective price constraints. Journal of Business & Economics, 10 (4), 71-76 Garg, S. (2010). Microeconomics: Introductory. 7th edition, pp 3.11-9.17, Dhanpat Rai Publication Garrison, R. (2005). Linking the Keynesian Cross & the Production Possibilities frontier. Journal of Economic Education, Volume 26 Mayerhoefer, C. & Zuvekas, S. (2008). The shape of demand: what does it tell us about direct to consumer marketing. The B.E. Journal of Economic Analysis & Policy, Volume 18, Issue 2, pp. 4-8 Pindyck, R. and Rubinfeld, D. (2013). Microeconomics: International Edition, 8th Edition, USA: Pearson Education Shepherd, G. (2006). Vertical & Horizontal Shifts in demand curve. 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