Question 1:

a)

i)

Determine the price elasticity of demand for A:

In due to a given in price, price elasticity of demand is a metric for determining what more quantity
demanded varies. The change in the quantity requested divided by the percent change in price (see
also Elasticity of demand) is determined. As you will find sooner or later, though, this process has an
irritating restriction: if we use it to measure the price elasticity of two separate positions on a
demand curve, it won't yield distinct results. Thankfully, to resolve this situation, there's also a neat
technique we can use: the so-called middle point process to measure price elasticity. In the
subsequent paragraphs, humans will know point by point how to measure price elasticity using the
middle point formula. Although before we get there that, let us just take a deep breath to see why,
first and foremost, the issue we listed earlier arises.

Elasticity on a Curve Between two points:

If we try to measure the price elasticity of demand among two points on a demand curve, we easily
see how the elasticity from point A to b tends to be unique from that of point B to point A. Although
at first it sounds strange, this makes absolute sense since we normally measure percentage changes
compared to their original value. Currently, if we switch to point B from point A, the calculated
values will be at level A. Even so, the value obtained is at level B if we switch from point B to point A.
Let having looked only at graph underneath to demonstrate this.

The Formula of the Midpoint:

As stated earlier, by using the this-called midpoint approach, one can prevent this issue. Typically,
one divide each change by the initial value and multiply the outcome by 100 once we measure
percentage changes. In comparison, the midpoint formula separates the shift by the estimated cost
of the initial and final value.

Midpoint Formula:
Price elasticity of demand = (Q2 - Q1)/[(Q2 + Q1)/2] / (P2 - P1)/[(P2 + P1)/2]
=(15,000-10,000)/[(15,000+10,000)/2]/(0.90-1.10)/[(0.90+1.10)/2]
=(5000)/[(25000)/2]/(-0.2)/[(2/2]
=(5000)/(12500)/(-0.2)/(1)
=0.4/-0.2 = -2
Midpoint Formula:
Demand price elasticity = (Q2-Q1)/[(Q2 + Q1)/2] / (P2-P1)/[(P2 + P1)/2]]/[(P2 + P1)/2]
That equation seems far more complex than it really is. During that point, all one need to do
is division the effect on the quantity requested, determined by the percentage change in
price. As a consequence, demand price elasticity equals.

Income elasticity of demand for A:

Income demand elasticity (IED) indicates the connection between it and a shift in sales and
the amount requested for a certain particular product.
Various goods have a distinct market elasticity for profits.
Standard products often have a significant demand elasticity in terms of sales, which means
that demand is approximately equal to their revenue.
Income Elasticity=(Change in QD)/[(Old QD+New QD)/2]/(Change in income)/[(Old income-
New income)/2]
=(15000-10000)/[(15000+10000)/2]/(25000-3000)/[(25000+3000)/2]
=(5000/12500)/(-500/2750)
=(0.4)/(-0.192) = 3.85
Cross Elasticity of Demand for product A=Change in QD of A/ Change in income
=0.4/-0.182
=3.85
For product B= Change in QD of B/ Change in income
ii)
As price of product A increases by 5% and income of household increases 3%. People will
not prefer to buy the product A but they will move toward the product B because it’s price
increase by 2% only so the revenue generated by product B will be higher than the product
A due to its high price.
b)
Qd=20-0.05Q
Qs=10+0.05Q
As at equilibrium
Qd=Qs
20-0.05=10+0.05Q
20-10=0.05Q+0.05Q
10=0.1Q
100=Q
So equilibrium quantity is 100.
By putting value of equilibrium quantity in eq.1
P=20-0.05(100)
P=20-5
P=15
So equilibrium price is 15.
As price rice equilibrium also change and consumer and producer surplus get effected. So
dead weight loss is also occur.

Q2:
a) The optimal output of the firm is produces at MC=MR
MC is marginal cost of the firm that is produces by dividing the change in total cost of the
firm to the change in quantity of the firm and marginal revenue is change in total revenue
of the firm to the total quantity. Firm will continue to produce the quantity of the product
until MC becomes equal to MR when marginal cost of the product is higher then marginal
revenue then firm will stop the production of that commodity and in the long run if the
cost is much more highest than the revenue then the firm will move towards shut down.
From the given data:
Optimal Output
MC=MR

MR=Dtr/Dq
TR=PQ
When P=10 & Q=20
TR=20*10=200
MR=200/10=20
MC= Dtc/Dq=40/10=4
So MR is much higher marginal cost.
b)
Qd=P= 30-0.2Q
MC=10+0.1Q
Fixed Cost=20
TR=PQ
TR=(30-0.02Q)1
=30Q-0.2Q2
MR=Dtr//Dq=d/Dq(30Q)-d/Dq(0.2Q2)
MR=30-0.2Q
By equating
MR=MC
30-0.2Q=10=0.1Q
30-10=0.2Q+0.1Q
20=0.3Q
20/0.3=Q
66.66=Q
By putting in Eq.1
P= 30-0.3(66.66)
P=30-13.34
P=16.66
Profit= TR-TC
TR=PQ
TC= Fixed + Variable Cost
TR= (16.66)* (66.66)
T.R=1110.56
TC= 20+16.66
=36.66

Question 3:

a): Payoff Matrix

 
Golden Catch Vs. Silver Net
–  
   
Silver Net
 
Payoff Matrix
   
   
Cooperate Defect
 
     
Cooperat
Golden Catch $2,000, $1,500 0, $1,000
e
    750  
  Defect 750

NASH Equilibrium:
Within game theory, Nash equilibrium is a concept where the optimal outcome of a game is
where there is no incentive to deviate from their initial strategy. More specifically, the Nash
balance is a notion of game theory where the optimal outcome of a game is one where, after
considering the choice of an opponent, no player has an incentive to deviate from his chosen
strategy.
The prisoner's dilemma is a popular scenario studied in game theory that can employ the
Nash balance. In this game, two prisoners are arrested and one is kept in solitary
confinement with no means of communicating with the other. The prosecutors do not have
the evidence to convict the pair, so they give each prisoner the opportunity to either betray
the other by testifying that the other committed the crime, or to cooperate by remaining
silent.
They both spend five years in prison as both prisoners betray each other. If A betrays B, but
B remains silent, prisoner A is released and prisoner B spends 10 years in prison or vice
versa. If each of you remains silent, each of you will spend only one year in prison. The
Nash equilibrium in this situation is for both players to betray each other. While mutual
cooperation leads to a better outcome if one inmate decides to cooperate with each other
and the other does not, there is a worse outcome for one inmate.

Q:4
a)
This type of problem is known as externality and it is defined as the effect of a person’s
action on the wellbeing of others. It can be of two types.
1) Positive Externality
2) Negative Externality
Positive externality is if the action of others are affecting positively others and the
wellbeing of other is enhancing then it’s called externality.
Negative externality is if the action of others are affecting negatively others and the
wellbeing of other is enhancing then it’s called externality.
Due to the palm oil companies the air is getting polluted then the company will pay tax to
provide the fresh and clean air to the residents. This tax will be charged by the
Government. The problem we are facing is due to the negative externality due to which
society is suffering and paying social cost of that externality and this cost will be paid by
the firm in the form of tax to the Government and society.
b)
QA = 40-0.5PA
QB= 30-0.25PB
QC= 10-0.2PC
MC=30
TOTAL DEMAND= QA+QB+QC
= 40-0.5PA +30-0.25PB+10-0.2PC
= 80-0.95P
Total demand= Q(A,B,C)
TR=PQ
(80-0.95P)*Q
TR=80Q-0.95PQ
MR=DTR/DQ=D(80Q)/DQ-D(0.95PQ)/DQ
MR=80-0.95P
MC=MR
30=80-0.95P
30-80=-0.95P
50=P
P=50/0.95
P=52.64
By P putting in eq.1
= 80-0.95P
=80-0.95(52.63)
Q=30.01
If the fee has been charged then only those will pay who are willing to enter in the fire work
display and the other who are not willing to enter they will not be charge and they don’t need
to pay anything.