VIETNAM NATIONAL UNIVERSITY

University of Economics and Business

…………

ASSIGNMENT:
FINAL EXAM MICROECONOMICS

NAME: Lưu Ngọc Anh Thư

Student code: 20050163
DOB: 22/07/2002
Class: QH 2020 E KTQT 2

Hà Nội, 2021

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Question 1:
“Imposing a quantity tax on a monopolist will always cause the market price
to increase by the amount of the tax”.
Do you agree? Give a real-life example and analyse to illustrate your argument.
Answer:
A per unit tax, or specific tax, is a tax that is defined as a fixed amount for each
unit of a good or service sold, such as cents per kilogram. It is thus proportional to
the particular quantity of a product sold, regardless of its price. Excise taxes, for
instance, fall into this tax category. By contrast, an ad valorem tax is a charge
based on a fixed percentage of the product value. Per unit taxes have
administrative advantages when it is easy to measure quantities of the product or
service being sold.
A monopolist is an individual, group, or company that controls all of the market
for a particular good or service. A monopolist probably also believes in policies
that favor monopolies since it gives them greater power. A monopolist has little
incentive to improve their product because customers have no alternatives. Instead,
their motivation is focused on protecting the monopoly.
Characteristics of a True Monopolist: A monopolist has full control of a market
and is the one supplier that provides a good or service to many consumers. Beyond
that, however, there are certain characteristics of a monopolist that stand out above
others:
• The primary concern of a monopolist is to maximize profits at all costs.
• A monopolist will have the power to arbitrarily decide the price of the goods
or products to be sold. Usually, this decision is made in such a way that
keeps prices as high as possible while satisfying consumer demand.
• The monopolist may go to extreme measures to ensure other sellers are
unable to go into business within the territory.
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 • Because of the lack of competition, the monopolist may be slow to make
product improvements or respond to consumer complaints.
To answer this question, I totally disagree. “Imposing a quantity tax on a
monopolist will always cause the market price to increase by the amount of the
tax” is a false assertion. In essence, the imposition of a tax simply reduces the
excess profits of the monopolist. So imposing a tax on a monopolist may cause the
market price to rise more than, the same as, or less than the amount of the tax, it is
not always necessary to increase.
To prove my point, let's analyse the following example:
I have a shop selling rice, the tax I normally have to pay is 5,000 vnd per kg
but for some reason the government increased that tax to 7,000 vnd. The tax
increase means that the price of rice is now subject to an additional fixed cost. As a
trader, if I want the profit received after the tax increase is still equal to the
previous profit, I can increase the price of rice, but that means my competitiveness
will decrease. Or simply I still sell the price before the tax increase and accept a
little less profit, at this time, my competitiveness increases. Taxes do affect the
price of goods, but to come to a decision about how prices rise or fall, the
businessperson is the one who decides.
Question 2:
If you were originally a lender, remain a lender even after a decline in interest
rates. Will you get better or worse after the interest rate change? If you
become a borrower after the change, will you get better or worse? Analyze
consumer behavior in the above situation.
Answer:
Present value (PV) is the current value of a future sum of money or stream
of cash flows given a specified rate of return. Future cash flows are discounted at
the discount rate, and the higher the discount rate, the lower the present value of
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the future cash flows. Determining the appropriate discount rate is the key to
properly valuing future cash flows, whether they be earnings or debt obligations.
PV Formula and Calculation

where:
FV=Future Value
r=Rate of return
n=Number of periods
1. Input the future amount that you expect to receive in the numerator of the
formula.
2. Determine the interest rate that you expect to receive between now and the
future and plug the rate as a decimal in place of "r" in the denominator.
3. Input the time period as the exponent "n" in the denominator. So, if you
want to calculate the present value of an amount you expect to receive in
three years, you would plug the number three in for "n" in the denominator.
4. There are a number of online calculators, including this present value
calculator.
Future value (FV) is the value of a current asset at a future date based on an
assumed rate of growth. The future value is important to investors and financial
planners, as they use it to estimate how much an investment made today will be
worth in the future. Knowing the future value enables investors to make sound
investment decisions based on their anticipated needs. However, external economic
factors, such as inflation, can adversely affect the future value of the asset by
eroding its value.

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Types of Future Value
Future Value Using Simple Annual Interest
The FV formula assumes a constant rate of growth and a single up-front payment
left untouched for the duration of the investment. The FV calculation can be done
one of two ways, depending on the type of interest being earned. If an investment
earns simple interest, then the FV formula is:

where:
I=Investment amount
R=Interest rate
T=Number of years
Future Value Using Compounded Annual Interest
With simple interest, it is assumed that the interest rate is earned only on the
initial investment. With compounded interest, the rate is applied to each period’s
cumulative account balance. In the example above, the first year of investment
earns 10% × $1,000, or $100, in interest. The following year, however, the account
total is $1,100 rather than $1,000; so, to calculate compounded interest, the 10%
interest rate is applied to the full balance for second-year interest earnings of 10%
× $1,100, or $110.
The formula for the FV of an investment earning compounding interest is:

where:
I=Investment amount
R=Interest rate
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T=Number of years
Future Value vs. Present Value
A comparison of present value with future value (FV) best illustrates the
principle of the time value of money and the need for charging or paying additional
risk-based interest rates. Simply put, the money today is worth more than the same
money tomorrow because of the passage of time. Future value can relate to the
future cash inflows from investing today's money, or the future payment required
to repay money borrowed today.
Future value (FV) is the value of a current asset at a specified date in the
future based on an assumed rate of growth. The FV equation assumes a constant
rate of growth and a single upfront payment left untouched for the duration of the
investment. The FV calculation allows investors to predict, with varying degrees of
accuracy, the amount of profit that can be generated by different investments.
Present value (PV) is the current value of a future sum of money or stream of cash
flows given a specified rate of return. Present value takes the future value and
applies a discount rate or the interest rate that could be earned if invested. Future
value tells you what an investment is worth in the future while the present value
tells you how much you'd need in today's dollars to earn a specific amount in the
future.
Therefore, to answer the question of whether I become better or worse
depends on other factors such as: time, interest rate, etc. And I can absolutely
calculate the theoretical future value of the money I intend to lend, or intend to
borrow. From there, weigh the pros and cons to come to a decision as well as
evaluate whether, better or worse.
Question 3:
In fact, production theory is much simpler than consumption theory because

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the output of a production process is generally observable, whereas the “output” of
consumption (utility) is not directly observable”. Explain this statement.
Answer:
Theory of production, in economics, an effort to explain the principles by
which a business firm decides how much of each commodity that it sells (its
“outputs” or “products”) it will produce, and how much of each kind of labour, raw
material, fixed capital good, etc., that it employs (its “inputs” or “factors of
production”) it will use. The theory involves some of the most fundamental
principles of economics. These include the relationship between the prices of
commodities and the prices (or wages or rents) of the productive factors used to
produce them and also the relationships between the prices of commodities and
productive factors, on the one hand, and the quantities of these commodities and
productive factors that are produced or used, on the other.
The various decisions a business enterprise makes about its productive
activities can be classified into three layers of increasing complexity. The first
layer includes decisions about methods of producing a given quantity of the output
in a plant of given size and equipment. It involves the problem of what is called
short-run cost minimization. The second layer, including the determination of the
most profitable quantities of products to produce in any given plant, deals with
what is called short-run profit maximization. The third layer, concerning the
determination of the most profitable size and equipment of plant, relates to what is
called long-run profit maximization.
Consumer theory is the study of how people decide to spend their money
based on their individual preferences and budget constraints. A branch of
microeconomics, consumer theory shows how individuals make choices, subject to
how much income they have available to spend and the prices of goods and
services.
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 Understanding how consumers operate makes it easier for vendors to predict
which of their products will sell more and enables economists to get a better grasp
of the shape of the overall economy
Limitations of Consumer Theory: Challenges to developing a practical
formula for this situation are numerous. For instance, as behavioral economics
points out, people are not always rational and are occasionally indifferent to the
choices available. Some decisions are particularly difficult to make because
consumers are not familiar with the products. There could also be an emotional
component involved in the decision-making process that isn't able to be captured in
an economic function.
The many assumptions that consumer theory makes means it has come under
heavy criticism. While its observations may be valid in a perfect world, in reality
there are numerous variables that can expose the process of simplifying spending
habits as flawed.
The given statement “ In fact, production theory is much simpler than
consumption theory because the output of a production process is generally
observable, whereas the “output” of consumption (utility) is not directly
observable.” conveys the idea that it is comparatively convenient and simple to
calculate the amount or quantity of goods that are being produced within a firm,
territory, or country to determine the economic worth directly. On the other hand,
estimating the amount or quantity of goods consumed by the people across a region
or country is difficult and can not be observed directly. However, the latter is given
more significance and determined more usually through calculating the
expenditure made by the consumers depending on their choices and within their
income constraints and these are the primary factors that affect the economic
growth or development while the production theory lays emphasis on the
maximization of profit. We can calculate the production capacity of a company but
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cannot calculate exactly how much goods of that company will be sold, so to make
the perfect choice, the economist businesses must pay more attention on
consumption factors.

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