How can we use the price elasticity of demand to predict the effect of taxes?

The impact of tax largely depends on the price elasticity of demand. With the demand being inelastic, the imposition of tax will lead to a smaller decline in the demand and the government will experience a significant rise in the revenue collection. The opposite will hold true for the elastic demand.

How does a minimum price (floor price) affect the market?

The imposition of a price floor or minimum price will set the market price higher than the equilibrium price. The higher price would lead to an increase in the supply and a decrease in demand. More supply and less demand would lead to excess supply in the market.

Explain the Equi marginal principle.

The law of Equi marginal principle explains the behavior of the consumer while distributing the limited income amongst various goods and services. The consumer will consumer at a point where the value of (Marginal Utility/ Price) of all goods become equal.

The short-run average total cost curve (ATC) is U-shaped because of conflicting effects of (a)decreasing average cost at a lower level of output and (b) increasing average cost at a higher level of output.

How do indivisible inputs affect production costs?

In a production process, when the indivisible factor of production is employed, it leads to an increase in the average cost of production when the output falls.

List and explain the five features/characteristics of a perfectly competitive market.

The features of a perfectly competitive market are:

(i) There are a large number of buyers and a large number of sellers.

(ii) There are entry and exit barriers.

(iii) The market deals in exactly similar or homogenous products.

(iv) A single buyer or a single seller cannot influence the market price or quantity.

(v) There exist perfect information in the market.

Explain the break-even price and shut-down rule.

Break-even price is the pricing methodology used in determining the price of a product. It is at a point where the firms earn zero profits, or, in other words, the cost is equal to the revenue.

The Shut-down rule states that the firm should close down its operations when it is unable to cover the average variable cost.

Fill in the blanks: A monopolist has market power, the ability to affect the price of a product. Consumers obey the law of demand and the higher the monopolist's price the lower the quantity it will sell.

Describe and explain a monopolist's output decision.

A monopolist will produce a profit-maximizing quantity, that is at a point where it's the marginal cost is equal to the marginal revenue. The monopolist will charge a corresponding price on the demand curve for the profit-maximizing output.

Fill in the blanks: Under monopolistic competition, the average cost of production is higher than the minimum, but there is also more product differenciation.