Question

The three questions are based on the Mankiw Principle of Economics. Please, try to illustrate your answer using graphs and figures, where you can. You can either use any graphical computer tools, or re-scan a printed out and solved version of this document.

1. Consider market of the product "face mask" a perfectly competitive one, and let's assume, that the product itself is a normal good. Based on these assumptions, please, try to answer the following questions. a) Please, plot a supply and demand curve for this product, mark the equilibrium price and quantity. (2 points) b) The government makes it mandatory to wear face masks in public building, ie. shopping malls, public transportation, etc. How will this affect the market of face masks (think about possible changes in supply and/or demand)? Use your previous graph to describe the changes, also explain it in a written form. (3 points) c) How will this decision of the government affect the price elasticity of mask demand? Why? (3 points) d) Due to decreasing availablity of masks from abroad, the total supply of mask decrease in the market. How will this change affect the equilibrium price and quantity? How will this affect the income of firms, based on your previous answers? (3 points)

2. Now imagine, that are different types of masks, made of different materials, designs. Let's imagine, there is a particular one, that you have just bought with a Mickey Mouse design (or if you wish substitute Mickey Mouse with your own idea). It was pretty pricey, compared to other, plain masks. You friends tell you, you shouldn't have bought it for this high price, as it is overpriced. Based on what you have learned on consumer's bevaviour, try to explain them, why they are wrong. (4 points)

3. Your cousin decides to give up her carrier as a salesperson with an annual salary of 15 thousand Euros to start her business of sewing designer masks. According to her calculations, she will need an initail investment of 3000 Euros to start the firms, while the costs of materials for one mask youd be 2 Euro. She thinks, she could sell 3000 masks of year for a price of 5 Euros. a) Calculte the total revenue, fixed costs, variable costs, and total costs, and the total profit of this firm. (3 points) b) Based on this, do you think it's worth for your cousin to launch this business? Why? (2 points)

The first question have already be solves. And I also need help for the second and the third question.

Answer 1

1a) the equilbruim price is P and qauntity is Q at the interesection of original demand and supply curve at point E. which is called equilbruim point.

b) when the government mandatory to wear face mask in in public building, then the demand for face mask will increase at each price levels and thus demand curve for face mask shift to the right and equilbruim price is increase and quantity also increase.

c) This decision will make the face mask makret more inelastic which means that quantity does not change with the change in price. so the market become less elastic or more inelastic.

d) When the availablity of mask from abroad , the supply of mask decrease which increase the equilbruim price and decrease the equilbruim quantity. it will decrease the income of firms , since the demand is high and supply is low, they cannot sell more mask at higher prices.