Question 1 (b)

  • Lump-sum subsidy will not change MC or MR, so it has no impact on the output.

    Perfect Competition Lump-Sum- Subsidy Short Run Market 8 perfect Competition Lump-Sum- Tax Short Run Market 8 s Quantity Quantity Profl Firm Loss QI QI ATC ATCsub Quantity ATC Quantity Long-Run Market Long-Run Firm Firm Market 02 QI Q2Qu Quantity Q2 02 ATCsub Quantity ATCtax Quantity

    Per Unit vs. Lump Sum A PER UNIT tax or subsidy affects the VARIABLE COSTS so MC, AVC, and ATC will shift. This WILL affect the quantity produced A LUMP SUM tax or subsidy only affects FIXED COSTS so only AFC and ATC will shift. MC stays the same. This WILL NOT affect the quantity produced 31 Copyri ght ACDC Leadership 201 S

Question 2 (a)

  • Marginal utility

    • The extra satisfaction received from consuming an additional unit of a good or service.

Question 2 (c)

The price elasticity of demand determines whether the demand curve is steep or flat. Note that all percentage changes are calculated using the midpoint method 2.... 2.. 2.. 1 FIGURE The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 (b) Inelastic Demand: Elasticity Is Less Than 1 Price $5 4 1. An Increase n price . 0 Price $5 4 Increase •n price 0 Demand IOO Price $5 4 Increase In pnce . Quantity 90 IOO Demand Quantity leaves the quantity demanded unchanged. .. leads to an 11% decrease in quantity demanded. (c) Unit Elastic Demand: Elasticity Equals 1 Price $5 4 Increase In price 0 IOO Demand Quantity .. leads to a 22% decrease in quantity demanded. 2.. (d) Elastic Demand: Elasticity Is Greater Than 1 50 IOO Demand Quantity Price $4 0 (e) Perfectly Elastic Demand: Elasticity Equals Infinity . At any price above $4, quantity manded is zero. Demand . At exactly $4, consumers will buy any quantity. Quantity .. leads to a 67% decrease in quantity demanded. 3. At a price below $4, quantity demanded is infinite.

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