The market is at an initial equilibrium with a price level at €16 and the quantity at 12 million units

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ANSWER ALL QUESTIONS

Assignment 2

 

Question1

 

The market is at an initial equilibrium with a price level at €16 and the quantity at 12 million units. The indirect tax of €12 per unit brings the market equilibrium at a price level of €24 per unit and reduces the quantity to 8 million units (for the purpose of constructing a relevant figure, assume that the initial supply curve intersects with the y axis (price) at €4 while the (new) supply curve after the shift, intersects with the y axis at €16, while the downwards sloping demand curve intersects with the y axis at €40). 

 

Required: With the use of a relevant figure, explain the impact of the indirect tax to the market and indicate the changes in consumers surplus, producers surplus and the deadweight loss. 

 

 

Question 2

 

Analyse and briefly explain (with the aid of an appropriate diagram) how a firm, operating in a perfectly competitive market, and earning short-term supernormal profits, in the long-run will adjust to a market equilibrium earning zero or normal profits.    

 

 

Question 3

 

Analyse and briefly explain with the aid of an appropriate diagram) how a firm operating in monopolistic market conditions (the monopolist) may earn short-term and long-term supernormal profits. 

 

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