micro-economics

Topics: Supply and demand, Economics, Microeconomics Pages: 7 (1679 words) Published: May 7, 2015
QUESTION 1

a. A downward-sloping demand curve shows in both graphs when the quantity at each price is doubled what it was. However, the curve in demand for pharmaceutical drugs is drawn with a relatively steep slope as inelastic products. Equilibrium price down-sloping along the demand curve while quantity in both market increased to some extent. b. In inelastic demand of pharmaceutical drugs, the percentage change in price is greater than the percentage change in quantity demanded. While in elastic demand, the percentage in price is less than the percentage change in quantity demanded. When the quantity at each price is doubled in both markets, a 50% reduction in price would cause a smaller increase in quantity in inelastic demand of pharmaceutical drugs than in elastic demand of computers. c. In the pharmaceutical drugs market, the quantity demanded is not very responsive to price due to its inelastic character. However, the change in price directly influence the quantity demanded in computer market because of its elasticity. So total consumer spending on pharmaceutical drugs would not change much while the total spending on computers would increase concerning a cheaper price.

QUESTION 2

a. Opportunity cost defines as the highest-valued alternative that must be given up so as to choose another one. b. The $50000 per year must be given up as an accountant which constitutes my opportunity cost if I choose to run a hardware store in this case. No, I would not open the store. Comparing total earnings per year in the following two conditions: (i) Open the store: $510000-$500000-$50000=-$40000

(ii) Not open the store: $50000 accountant earnings
Thus, it constitutes an actual loss each year if opening the store. c. Fixed costs are costs that remain unchanged as the quantity of output changes. For example, the cost of acquisition of the building, payment for store equipment and Internet advertising. d. Variable costs are like labor costs, electricity cost and raw materials costs if I decide to open the store, because they would change as the quantity of output changes.

QUESTION 3

The motel is better off keeping carry on business rather than shut down even if in peak season. As it is concerned, the fixed costs of $75 would not be changed whether the business be paused or not. That is, that portion of that cost would still go on if the motel is being shutting down for a period of time. Like every other firm, the motel would minimize costs, so two conditions of costs that incurred in peak season are discussed below: Shutting down in peak season:

TC=FC+VC=$75+$0=$75
Keep opening in peak season:
TC=FC+VC=$75+$40-$60=$55

b. Under the price discrimination, digital cameras are sold for very high prices when they are first introduced and later lower the price. This is because some consumers are early adopters who will pay a high price to own new products, after the demand of the early adopters was satisfied, the camera company would reduce its price to attract more price-sensitive customers. Another example of ticket price in cinema: The cinema company charges much less price for afternoon showings than evening showings so as to attract more customers in the afternoon. If charging the same low price for evening shows, it would not be profit maximization for company due to too much tickets sold. Thus, the cinema company would adjust to increase the ticket price to the extent that the marginal cost equals to the marginal revenue.

QUESTION 4

Abstract
There has been a significant increase in drug-related crime recently in the acceptance of drugs spread. Although drugs use may have numerous substantial advantages to save people’s life, there are some other adverse effects exist from the government’s perspective due to relative crimes commitment. Using selected model and empirical findings from economic theories, this paper examines the effect on policy of drug prohibition using SD curve and elasticity...
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