Monopolistic Competition and Oligopoly, Market Failures and Government Policy - Assignment Example

MACRO AND MICROECONOMIC ASSESSMENTS By (Name) Course Professor’s Name University Name City, State Date of Submission Task 1: Monopolistic Competition and Oligopoly (a) Price discrimination and its conditions Price discrimination involves charging a different price to different markets or different groups of people for the same good. In market perspective, price discrimination involves a situation where the same product is sold at different prices. In this case, the consumers are grouped into two or more independent markets and separate price is charged in each market, even though there is no difference in the cost of production. Firms will resort to charge different prices under the following conditions: 1. The firm must operate in imperfect competition; it must be a price maker with a downwardly sloping demand curve. 2. The firm must be able to separate markets and prevent resale e.g. stopping an adult using a child’s ticket. 3. Different consumer groups must have elasticity of demand e.g. students with low income will be more price elastic. (b) Why do cinemas charge half price for admissions on Tuesday evenings and full price on other days? Firms take advantage of situations especially when demand increase of the same good or service. For instance, cinemas will charge half price for admissions on Tuesday evenings due to increased demand but take advantage of other days to charge full price to sustain revenue as illustrated in the graph below; P P2 P1 D 50 100 Q The demand and spread of days on which many people come to watch cinemas dictates the different prices charged for movies. However, the profit or revenue needs to be maintained or sustained. On Tuesday evenings, there are more people than on other days and hall is full, thus demand so high as the price is lowered. On other days, demand reduces as prices charged full. (c) How will the consumers and firms benefit or lose from price discrimination? For consumers, they benefit from low prices at stages where the prices are charged lower on the same product. However, some who lacks the knowledge of separate prices lose. Firms on the other hand benefit from increased revenues, thus enabling a firm to sustain its sales and businesses. Some firms get the benefit of driving out of business their competitors (predatory pricing where price is less than average cost). Task 2: Market Failures and Government Policy (a) Define the terms public goods, private goods and merit goods with examples. Public good- A public good is a good or service that a consumer can take without reducing its availability to another consumer. The government normally provides them free, and none is excluded from its consumption e.g. roads. Private goods- private good, the opposite of public good, is produced and purchased for consumption whereby its consumption by one consumer prevents other consumers from consuming the good or service, for instance food, etc. Merit good-merit goods are goods whose value goes beyond the forces of demand and supply. The government or the provider provides them free for the benefit of the entire society, especially by the government because they would be under-provided if left for private businesses. Examples are free education, free vaccination, among others. (b) Some roads can be regarded as public goods, others as private goods. Which type of roads can be provided by the market? Why? Is this a good idea? Public roads are the roads controlled and maintained by the government and used by everybody without any constriction while private roads on the other hand are for individuals or private firms constructed and maintained by them. The public goods cannot be provided by the market because their essentiality to life cannot be left under the forces of demand and supply. On the other hand, leaving private goods to the control of the markets may or may not be a good idea considering the competitive nature of a market and exploitations that will exist in the market. (c) The table below gives the costs and benefits of an imaginary firm operating under perfect competition whose activities create a certain amount of pollution. Study the table and answer the following questions. (It is assumed that the costs of this pollution to society can be accurately measured.) Output (units) Price per unit $ (MSB) Marginal ( private) cost to the firm $ (MC) Marginal external (pollution) costs $ (MEC) Marginal social costs $ (MSC) 1 100 30 20 120 2 100 30 22 122 3 100 35 25 125 4 100 45 30 130 5 100 60 40 140 6 100 78 55 155 7 100 100 77 177 8 100 130 110 210 (i) What is the profit-maximizing level of output for this firm? The profit-maximizing level of output for the firm is the output at which the marginal cost is equivalent to the marginal benefit. At 7 units, the MB=MC=100 (ii) Calculate MSC and determine the socially efficient level of output? Marginal social cost =MPC + MEC The MSC for the 8 units are as calculated in the MSC column in the table above. The socially efficient level of output occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC). Thus, the socially efficient level of output is 8. (iii)Why might the marginal pollution costs increase in the way illustrated in this example? The marginal pollution cost might increase because the benefit is constant and the social costs increases with every unit output. Task 3 Suppose that our hypothetical economy- Disneyland produces Cars and Cameras. From the table given below calculate Real GDP and Nominal GDP Year No of Cameras Price per camera No of cars Price per car 2005 200 $10, 000 1,000 $6,000 2014 1000 $ 2,000 1,500 $ 10,000 (i) Calculate Nominal GDP for the year 2005 and 2014. Nominal GDP involves the GDP without tax deductions Using the expenditure approach, Nominal GDP for the year 2005 and 2014 = C + I + CI = G + (X - M) For 2005= $2Million+$6million= $8 million For 2015= $2 million + $15 million= $17 million Nominal GDP= 17 +8= $25 million (ii) Calculate Real GDP in the year 2014, using 2005 as the base year price For the base year, Real GDP=Nominal GDP In 2005, the Nominal GDP= $2million + $6 million = $8million Consider the multiplier = ΔGDP/J, where j is the change in prices =9/4 =2.25 From 2005 to 2014 is 9 years, suggesting the real GDP for 2014 is 2.25*9 = $20.25 million (b) List and explain briefly the key macroeconomic objectives. Key macroeconomic objectives include the following: Full employment-full utilization of resource in an economy and those who are able and willing to work can get one without assuming the natural rate of unemployment. Increased productivity- every economic mission is geared towards increasing productivity, i.e. more output per unit of labor per hour. Price stability- price stability eliminates the negative impacts of inflation Sustainability- rate of growth should allow for increased standard of living that determines the level of consumption (d) Explain the four stages of the business cycle. The business cycle is the fluctuations in economic growth rates due to uncertainties, shifts, and movements of certain variables of the economy that are either expected or unexpected. A business cycle goes through four phases as described below: Boom- period where there is rapid growth as the economic expansion increases demand for both capital and consumer goods. Investment, expenditure, and consumption increase. Recession- this is the economic slowdown when the level of economic production start declining due to underutilized, reduction of work rate, persistence of supply side effects, cyclical fluctuations in aggregate supply and demand, among others. Depression-production and demand for goods and service decrease forcing major components of the economy to shut down Recovery-characterized by a growing confidence in aggregate demand in the economy, production begins to rise, and so do the other components of the economy. Task 4 The Determination of Gross Domestic Product (GDP) (a) Consider the table below showing data for a hypothetical economy called Disneyland in millions of dollars. Hypothetical Economy: Disneyland Savings 200$ m Gross fixed capital formation 575 $ m Household Consumption 1550$ m Income tax revenue 750$ m Indirect tax revenue 475$ m Import expenditure 600$ m Export expenditure 850$ m Government expenditure on goods and services 900$ m (i) Calculate the level of GDP for Disneyland. Using expenditure approach, GDP: C + I + CI = G + (X - M) = 900$ m + (850$ m-600$ m) = 1,150 $ m (ii) Calculate the withdrawals from and injections into the circular flow and explain. Withdrawals = S+T+M =200$ m+750$ m+475$ m +600$ m =2.025$b Injections =I+G+X =575 $ m+900$ m+850$ m =2.325$ m (b) The table below shows economy of Disneyland’s aggregate expenditure schedule (in $ billions). GDP 100 120 140 160 180 200 220 National Expenditure 115 130 145 160 175 190 205 (i) Define the concept of multiplier and draw the figure to show the government expenditure multiplier? The concept of multiplier involves an increase in the final income due to an increase or an injection of spending. The size of the multiplier depends on the national expenditure. Like in the table above, The government expenditure multiplier = change in GDP/ change in the National expenditure =10/15 =0.6667 (ii) Assume that full employment is achieved at a level of GDP of $200 billion. Will there be an inflationary or a deflationary gap, and what is its size? Illustrate and explain. Inflationary gap exist when equilibrium GDP>full employment i.e. Injections>withdrawals Deflationary gap exists when equilibrium GDP Injections In this case, full employment =$200 billion Equilibrium GDP=160 which is less than $200billion hence a deflationary gap. The gap is $40billion Read More