MBA 603 Exercise 1.
You are an economist in the Internal Revenue System and just heard of a plan to increase the sales tax on a certain widget by $.06. Last year customers purchased about 10 million widgets. The demand curve in the last year was such that a $.01 increase in price decreases sales by 100,000. A study showed that a $.01 increase in price resulted in producers willing to provide 50,000 more widgets to the market. Congress stated that this $.06 tax will increase government revenues by $600,000 and raise the price of each widget by $.06. Is this correct? If so, explain why this is the case and, if not, what is the increase in prices and revenues?
MBA 603 Exercise 2.
Suppose you operate in a monopoly environment and you set your price in order to achieve maximum profits. Is your demand elastic, unitary elastic, or inelastic? Does your answer change if you were in a monopolistically competitive market? What happens to the elasticity when you go from a monopolistic market to a monopolistically competitive one? Explain and give an example.
MBA 603 Exercise 3.
Retailer companies sell many products for which manufacturers have a suggested retail price printed on the package. Based on what we discussed in the course, is there an economic reason for this price? If you are the manager of a retailing outlet, what factors will determine whether you should charge the suggested retail price or some higher or lower price?
Companies can typically maximize their profits by operating at the minimum average total cost curves, independent of the economic environment. Is this statement true or false? Explain.
You are the manager for a monopoly with costs, demand, and marginal revenue as in the graph at the top on Figure 1. a. Does the fact that you operate in a monopoly always guarantee that you can achieve higher profits by increasing the price? Explain.
The following questions refer to the Planet Money podcast ”Kid Rock vs The Scalpers” available on the Blackboard course page (Week 2). a. What is the product and who are the market participants? and get the it back to profitability. The business has been experiencing many months of losses which, according to the owners, is a probable consequence of an outdated membership pricing strategy. The owners asked you to look at the following economic data from a market research firm, which is split between three groups: Retired Community, Students from a local University, and Professionals.
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