Question

QUESTION 4

a. Draw two models, a monopoly market (price-setters) and a perfectly competitive market (price-takers). On each of your models show the equilibrium point and show any areas of consumer surplus, producer surplus and deadweight loss. Label all relevant axes, points and curves on your model.

b. Discuss how important investment in research and development would be in each type of market structure (monopoly and perfectly competitive). [max words: 150]

c. In 2017 the US city of Philadelphia introduced a 1.5-cents-per-ounce tax on sweetened drinks such as soda and energy drinks. Discuss the likely effectiveness of this tax. [max words: 150]

d. Discuss what, if any, implications the tax on sweetened drinks will have on inequality within the city of Philadelphia. [max words: 250]

Answer 1

a) In monopoly firm, they are the only producer of the product so the price of the product is decided by the firm that is P* so here in case of monopoly only the upper segment consumer are getting benefited as the price they are ready to pay is higher than the monopoly price. compare to perfect competition the monopoly produces less and charge more so the producer's surplus is high in case of monopoly.

In perfect competition the price was decided by the market where different firms are producing homogeneous products at the same price so there is no chance of loss to the market. the total surplus is the combination of consumer surplus or producer surplus.

b) investment in research development is having a special impact on each type of market. before doing research and development in a product if it will be produced and put forward for sell then the cost of production is high that leads to a high price of the product and to acquire a market share the producer or the firm will reduce the price up to its cost. so overall there is losing face by the firm. when there is an introduction of research and development that provides mainly two benefits. i) improved and zero-defect product. ii) The cost of production is at its lowest. so the research and development will overall reduce the cost of production and the price of products which will enhance the market value and market share of the firm. the firm from any type will be more benefited from the producer's surplus with more profit.

c)  In 2017 the US city of Philadelphia introduced a 1.5-cents-per-ounce tax on sweetened drinks such as soda and energy drinks. When there is a tax imposed that will impact the cost of the product so there is a shift in the supply curve. a shift in the supply curve will enforce the price of the product upward. when the price up definitely the consumption of the particular product will change or less. so in this case the equilibrium point also shifts to left and price goes up. so this is the impact on the supply-side or the firm side. Now if we will discuss the government side they impose such tax ion those products which can't be avoided by the consumers so anyway there is an additional tax collection by the government and it added to the country's economy.

d) yes any kind of special tax imposed by the city itself will create inequality between the price of the product in different cities in the US. So when Philadelphia impose such types of tax that push the consumption of such type of product by its citizens, whereas the supplier also not interested to supply these type of products as the cost and supply of the product is more and it reduces their margins. here this situation creates a situation where the same product in other parts of the county is less price and in a particular city, it is high people may like to purchase the same product from the other city or they will reduce the consumption which will also indicate the consumption of substitute products. here we can find the profit and loss by the city in terms of inequality. If the product is a domestic product and the city imposes a tax then there is a partial loss bear by the government also whereas if it is a foreign product the producer/supplier will face the problem and the government will earn profit from it. Now if we will discuss the substitute products the scenario is just reverse. if the product is domestic and the substitute is foreign then the foreign firm will earn profit where the substitute is domestic and the product is foreign then the government and the local firm will earn profit from this type of taxes.