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New Microsoft Office Word Document - Question 1 Part a...

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Question 1 Part a Consider a firm which is operating in a perfectly competitive market. 1. Draw a carefully labelled diagram of the firm’s short run cost curves. 2. Use this diagram to explain why the short-run average cost curve is typically “U” shaped. 3. Explain why the firm might find it worthwhile to shut-down in the short run. Part b 1. Use the Supply and Demand model to illustrate the effects on competitive market equilibrium, of the imposition of a per unit indirect (sales) tax on a particular commodity. 2. Suppose the government intends the tax to reduce the consumption of some goods for example, cigarette or chewing gum. What will determine the effectiveness of the tax in reducing consumption?
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Question 2 Part a Draw the demand curve for a good and explain the impact of the “income and substitution effects” on its slope? Part b The Rail Transport Authority receives the following two pieces of expert advice: 1. “You should cut rail fares in order to encourage greater use of rail travel. Raising fares will mean fewer customers and lower revenue.” 2. “You cannot afford to cut fares as this will reduce your revenues” (a) What does each of these pieces of advice assume about the elasticity of demand for rail use? Draw a diagram to explain your answer. (b) How might an economist seek to resolve the conflict of opinion? Question 3 Part a Use the “income effect” and the “substitution effect” to explain the “Law of Demand”. Illustrate your answer with a diagram. Part b
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This note was uploaded on 05/01/2011 for the course ECON 1011 taught by Professor A during the Three '11 term at University of New South Wales.

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New Microsoft Office Word Document - Question 1 Part a...

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