AADHITYA NARAYANAN

L19BALB111
BA LLB SEC B
PART A
1)
A) The author has concluded that price elasticity at the same time as consumers cutting back
on travel and turning to cheaper alternatives. They decided to provide an insensitive price to
the customer for liking the product, as that was the only reason, he made a profit, as the
business was already suffering from loss and the only way to attract the customer was this
option. As customers are easily drawn to various insensitive offers, a business cannot make
decisions based on intuition, intuition, latest management style or so-called traditional
management if they want to remain be successful which is not suited for both the long-term
market and perfect competition. There is a lot of competition and customers are attracted to it
and the business turns from losses to profits. Recession pushes customers and puts the
business at a disadvantage, if it is not controlled at the right time, there is a strong possibility
of a shut- down of the business. But sometimes customers are conscious that there is a price
increase before the indent, so it would make no sense to them as they would not have such a
profit, but at the same time customers would become easily insensitive and this is another
smart way to move the company's profit graph upward.
B) Elasticity refers to responsiveness to quantity demanded or supplied. If a good is elastic, it
means that the quantity will not be affected by changes in prices but if a good is inelastic, it
means that the quantity demanded will be affected by changes in price. Negative relationship
between elasticity and revenue is there
When there is an increase in price elasticity, revenue will decrease
When there is a decrease in price elasticity, revenue will decrease
When demand is perfectly elastic, revenue is constant
Elasticity and revenue are constant linear demand which is seen similarly in revenue
In the case, there Rs 3.75 and so Rs 4.05 and at 44% and their profit is Rs 1.78 then there is
increase in profit from Rs 30 paise thus increasing the revenue is only way when there is a
fall in elasticity.
C) Moonbucks operates in a perfectly competitive market, as a small change in price results
in a varied result change in Demand. Therefore, consumers are easily switching from one
option to another, they are easily attracted to offers, small changes, etc can make a huge
difference in revenue, because we know that there is a better option for buyers in this market.
As we have seen in the previous paragraph, Moonbucks are easily attracted to other options
by giving them valuable insights.
PART B
2)
When there is a war on drugs who have the purpose of keeping such drugs out of the country,
the supply of the drugs will decrease since sellers who are dealing with such drugs will be put
in jail, so sellers will raise their price of their drug-dealing to compensate the risk involved
and they will reduce the quantity of drugs sold, which means that there will be an decrease in
supply of drugs, when there is a decrease in supply, price increases and quantity decreases.
However, when there is a movement like say no to drugs campaign, which address the
harmful effects of drugs, people will be more aware of the drug and will stop consuming it.
This means that there will be a decrease in demand, meaning that price and quantity will
decrease.
A war on drugs, will be very harmful to society and will raise the revenue for the drug sellers,
since the people who take drugs in that time are addicted to them. Having drugs will be their
priority, which means that they will be ready to sacrifice whatever price is there. This makes
the demand of the drugs, inelastic and we know that revenue of a product depends upon the
inelasticity of a product, more inelastic, higher will be the revenue. War on drugs in a
nutshell will both rise revenue and will not stop drug addicts or people from consuming it.
3)
When a tax is being imposed on goods which is inelastic, (in the case of food here),
consumers will bear the burden of the tax. This is because the burden of a tax will depend on
the inelastic. Even though people bear the burden of the tax, they are forced to pay it since
food is a necessity and they cannot ignore it.
It is a good way to raise revenue, since the deadweight loss gained from taxing goods with
inelastic demand have low deadweight loss. We also know that the tax revenue will be high
since the more inelastic it is, the higher will be the tax revenue. It will also depend on what
kind of tax the government is levelling like small or big tax. Even though it is a god way to
raise revenue, poor people will be affected the most since they will not have money to
survive since most of the money will go to food.
4)
a)
To understand this question, we must calculate the total costs from both devices and compare
the marginal costs from both devices, to see whether the offer should be accepted or not.
For ATC= 301 AND Q IS 601
ATC= TC/ Q
301= TC/ 601
TC= Rs 180,901
FOR ATC= 300 AND Q IS 600
ATC= TC/Q
300= TC/600
TC= Rs 180,000
By Comparing both TC we see that MC= 18901 – 18000 = Rs 901
Since the marginal cost of selling that extra device is 901, we should not accept the offer
since as the marginal cost increases, the total revenue earned will decrease. Hence it is not
advisable to sell it.
b)
Sunk costs refers to costs that has been already spent which cannot be recovered. Every sunk
cost is fixed cost but not every fixed cost is sunk cost. Sunk costs in this case is equal to Rs
300 per month, this is because having a membership in the residential club where the money
that was spent on food and concerts that were offered in the club as perks offered in the club
can be avoided and the money spent on food and concerts can be spent elsewhere other than
the club. It depends on the scenario, if food and membership is being paid then the sunk cost
would be Rs 800 or if the concert is paid along with club membership then sunk cost will be
Rs 450

5)
A)
In a perfect competition, it is a price taker meaning that in a market like that both buyers and
sellers cannot influence the price of products, only the market price prevails. If a seller
increases the price, consumers will not buy from his shop. So hence they are forced to sell at
the market price
In a monopoly when more and more quantities are sold, it has two effects, it increases the
quantity sold which thereby increases the total revenue gained by the market. The other effect
is that price must decrease to sell more quantity thereby reducing the total revenue. A
competitive firm does have this problem since it can sell at the market price and does not
receive less for the products they are selling, therefore in a competitive market price=
marginal revenue, whereas in a monopoly marginal revenue is less than price., since it must
decrease price and increase its quantity which thereby decreases revenue.
b) Economic profit takes both implicit costs and explicit costs
Accounting profit takes only explicit costs into consideration.
Accounting profit tells us if a business is converting some money and making some money
for the owner.
Economic profit tells us if it makes sense to run a business like this. Only real money
transfers are considered in accounting profits. Only the actual payment and expenses are
considered. Whereas economic profits also consider opportunity costs. That is, what
opportunity could have been utilized if it were not for the business.
Say, if a lawyer having a steady income of Rs 150000 a year stops his practice and starts a
business and gets a revenue of Rs 400000. To calculate accounting profit, subtract all the
monetary expenses such as rent, labour, etc. from the revenue. Let us say the net profit is Rs
100000. As far as accounting profit is considered, the business is bringing in money and is
successful. However, if we consider economic profit, we also need to subtract any
opportunity costs, (in this case, the doctor’s earnings before opening the business i.e.,
150000), we find the economic profit to be -50000 i.e., a loss Rs 0
Zero accounting profit means the business makes no money. It is in no profit, in a state of
loss. The turnover of a company is equal to its total financial cost. All the money earned by
the business is used to pay for expenses and nothing is left as profit. Therefore, zero
economic profit means that the business can earn money from the business, but it can get the
same amount by allocating its assets to some other use (renting) instead of the business. This
means that his total income is equal to his explicit costs plus (implied) opportunity expenses.
Running a business does not make sense, because without a business there can be equal
profits
6)
a) Marginal rate of substitution will be: - 10/5 which is 2.
b) Yes, I defend it if MP is greater than AP, AP rises. When more and more variable inputs
are applied, MP increases thereby AP also increases.
c)
The decoy effect is a where consumers change their preferences when presented with a third
option. We know that consumers always chose a cheap and rational option but, in this case,
they chose the expensive one. Example: - Let us say you go to a hotel that has both a gym
and a swimming pool. The membership for the swimming pool for year is 20,000 likewise
the membership of the gym is 22,000. Consumers have their own preferences but let us say
in this case, you want the swimming pool membership since it is cheaper than the gym. But
now there is an offer saying that if you join both the swimming and gym membership, your
total cost for 1 year would be 26,000. Here in this case, you will choose both the membership
because you can join both gym and swimming pool since they seem more attractive and is
only slightly costlier than both the gym and swimming pool membership.