Assignment 3

CONCEPTUAL AND COMPUTATIONAL QUESTIONS

1. The MCC Corporation produces a good (called A) that is a normal good.  Its
competitor, RCB Corporation makes a substitute good that it markets under the
name B.  Good B is an inferior good.
a. How will the demand for good A change if the consumer incomes decrease?
Answer:
A decrease in income will also decrease the purchasing power of the
consumer. If consumer income decreases, the demand for good A (which is a
normal good) will decrease as well, because there’s a tendency that because
of the decrease of income, consumer will look for alternative good, the good B
(which is an inferior good). 

b. How will the demand for good B change if consumer incomes increase?
Answer:
An increase in income will also increase the purchasing power of
consumer. If consumer income increases, the demand for good B (which is an
inferior good) will decrease, because the consumer will choose to buy goods
that are better or those that are not inferior, they have the capacity to buy good
A (which is a normal good). 

c. How will the demand for A change if the price of good WHY increases?
Answer:
If the price of good B increases, the demand for good A will increase.
Since good B is just a substitute good, or an inferior good, increase in it’s price
will increase the demand of good A, which is a normal good, because
consumer will choose to buy good A, a much better good. 
d. Is good B a lower-quality product than good A?  Explain.
Answer:
Since good B is an inferior good, we can assume that its quality is lower
than that of good A. Usually inferior goods or substitute goods, or much
cheaper goods, are less quality products compare to normal products. Good B
is a lower-quality product than good A, but it doesn’t mean its not good to use,
its just that good A is much better. 

2. Good A is produced in a competitive market using input X.  Explain what would
happen to the supply of good A in each of the following situations:
a. The price of input X decreases.
Answer: 
The decrease in the price of input X will result to an increase in the supply
of good A. If input of production are in a lower price, cost of production will be
 lower as well, that’s why producers will be encourage to produce more or
increase the supply.

b. An excise tax of P3 is imposed on good A.

Answer:
It is said that producers are willing to produce when prices are high than
when it is low. But in this case, excise tax will increase the price of the good
but producers will not receive the same amount, but much lesser than that. If
excise tax of P3 is imposed on good A, the supply will somehow decrease
because if producers will increase their production, they will incur losses, they
will bear the cost of tax. 

c. An ad valorem tax of 7 percent is imposed on good A.

Answer:
If ad valorem tax of 7 percent is imposed on good A, the supply of the
good will somehow decrease. This tax imposition will increase the cost of
production, and if the cost of production increases, this will lead to a decrease
in the quantity supplied or to be produced.  

d. A technological change reduces the cost of producing additional units of good

A.
Answer:
The supply of good A in this situation will increase. A technological change
reduces the cost of producing additional units of good A, thus increases the
number of supplies. Technological change will encourage the producers to
produce more.