Kaplan University MT445 unit 3 and 4 discussions

Topic 1

When a government wants to increase tax revenue, they will often increase the sales tax on gasoline. Using price elasticity of demand, explain why the tax would be placed on gasoline rather than, say, yachts. What might be the long run effect of raising the price of gas? In other words, who is harmed by the tax? Who benefits from such a tax? Are low-income households disproportionately harmed as compared to high-income households? Why or why not?

Topic 2

Many suppliers experience economies of scale as output expands, which implies that long-run average costs are falling. At very high levels of production, however, many firms are likely to experience diseconomies of scale. Why do firms experience diseconomies of scale as they increase production volume? How might firms “avoid” experiencing diseconomies of scale and what does the long-run average cost curve look like when diseconomies of scale exist?

Topic 1:

Describe an industry that would meet the conditions of a perfectly competitive industry:

1. There are many buyers and sellers so neither side of the market has market power.
2. The product provided to the market is identical across suppliers.
3. There are no barriers to entry.

How do individual firms in a perfectly competitive industry respond to an increase in the market demand for the product? Would advertising by individual firms in this type of market provide any benefits?

Topic 2

In order to maximize profits, monopolies produce where: MARGINAL REVENUE = MARGINAL COST < MARKET PRICE. Contrast this to the profit maximization condition for perfectly competitive markets and explain how these differences contribute to deadweight loss in a monopoly market. Can you think of reasons why a monopoly might decide on their own to increase production and lower prices to earn an acceptable profit rather than maximize profits?