Micro economics 300 - Essay Example

This information is enough to draw the demand curve of this product because we have got three points. For example, p1=8 and q1=4; p2=6 and q2= 6; p3=4 and q3=8. This will appear on a graph as shown below (d) Tax imposition will increase the price of good 2. This will have a negative effect on good 2 because it will reduce its demand. This means it will affect the demand equation of good 2. Suppliers will transfer the tax on good 2 to customers in form of increased price of good 2. As per assumption ii, the good has a positive cross elasticity of demand i.e. more than one.

This implies if the price of substitute goods increases, the demand of good x increases and the reverse is true. According to assumption iii, good x has got positive income elasticity of demand. That is the good is income elastic. If the disposable income of a consumer increases its demand increases and if it reduces, the demand will also reduce. (b) (i) Implies that the good is price elastic - if its price is reduced, there will be an increase in the quantity demanded, and if the price is increased, there will be a decrease in the quantity demanded. (ii) implies that if the customer’s disposable income increases the quantity demanded increases and vice versa.

(iii Implies that if the price of substitute products increases, the quantity demanded for this product will increase and vice versa. A monopoly firm is never a price taker as in the case of perfect competition market. It has powers to set prices at the profit maximizing level. This occurs where the marginal cost (MC) equals marginal revenue (MR). Moving vertically to the demand curve, this will dictate the price and the quantity produced. Monopolies therefore end up making abnormal profits.

Perfect competition market is price taker. This means that the forces of supply and demand dictate the price of