BEO6600 Business Economics

Table of Contents


To find a company in a highly competitive market, complete the following table:

What number of units can the firm produce to maximize profit if the market price is $16?

Imagine a flood leaving a coastal city without water for several days.

If there are no restrictions on price, you can use supply and demand analysis in order to determine the expected impact of flooding on the price for bottled water.

Discuss the possible effects of an anti-price-gouging law, which makes it illegal for individuals or businesses to raise the price of essential goods like water in an emergency.

To illustrate the law’s effect and to evaluate its effectiveness, create a graph.

Who is most likely to gain from the law? And who is most likely to be hurt by it?

Use a graph to explain the pricing decision made by a monopolist as well as the loss in deadweight due to monopoly.

b. QantasLink provides the only service between Sydney and Toowoomba at Brisbane West Wellcamp Airport.

Explain why QantasLink is unlikely to charge higher prices than the market price for this monopoly route.

Is there any other route in Australia where a monopoly could lead to much higher prices than this one?

To reduce smoking, many governments have implemented high taxes on cigarettes and tobacco products.

To critically assess the effectiveness of the policy, you will need to write an essay.

Your analysis should address the following questions:

1) Use the supply-demand model to explain how a tax might reduce sales of cigarettes.

2) Determine whether the demand for cigarettes elastic or inelastic.

3) Compare the tax with other policies, such as a price ceiling or education campaign.

4) Evaluate the effectiveness of the cigarette taxes as a policy to reduce the number of smokers.


Part a


TC = (FC+VC).




Part b




TC = (FC+VC).

Profit = TR-TC

The last column displays the profit from each output level, given the output prices and associated total costs.

The profit maximizing level is the highest profit level.

In this example, the maximum profit would be $ 8.

This means that the firm will produce three units of output.

This output production level produces marginal revenue that is almost equal to its marginal cost.

Part a

Floods can cause water shortages in coastal cities for several days. This is why it is common for households to seek out bottled water.

This would cause a rise in demand for bottled waters, which would also increase its cost.

Fig. How price changes when there is a high demand.

The price of bottled water before the floods was P. The equilibrium quantity that corresponds to this was Q.

The flood caused a rise in demand from Q1 to Q1.

This is represented by the shift of the demand curve between D1 and D2; the movement can be seen by the arrows.

The new demand results in a price increase from P1 to P1 since the supply has not been altered.

If there is a high demand, sellers may raise the price for bottled water.

Part b

Anti-price-gouging laws are likely to have the effect of preventing the market from improving.

Water is an essential commodity and one of the commodities this law applies to in the above example.

The law establishes a price limit that suppliers cannot raise for a commodity whose demand has increased due to an emergency.

The law stipulates that suppliers cannot raise the price for commodities that have a higher demand than they can supply. This would result in a shortage of supply as suppliers will be less willing to sell more at the maximum price.

The incentive for suppliers to supply the urgent demand will be reduced, creating a shortage.

The law shocks supply.

Graph: The Efficiency of Anti-Price Gouging Laws on Necessities

At price PBefore disaster, the quantity available and demanded was Q*. This is the equilibrium level (eBefore).

The quantity required increased from Q*, to Q2, and the demand curve shifted to DAfter from DBefore. This is the new equilibrium.

Suppliers would increase their supply to Q2 if the law wasn’t in place, but at very high prices.

PAnti-price goinguging is a way to prevent the supply from rising to meet increased demand.

PAnti-price going is the maximum supply.

This price is less than normal economic operations, so the demand will increase from Q2 toQ3.

Therefore, the shortage will equal Q3 -Q2.

This is a sign that the law leads to inefficiency.

While the law benefits the consumer, it is detrimental to the supplier.

This is evident from the argument that consumers would have to pay Pafter if there was no law.

Without the law, the supplier would supply at the high Pafter price. However, the law requires them to supply at a lower price PAnti price gouging.

Part a

Monopoly refers to a single seller that supplies the entire market.

This firm is immune to competition and has complete control over price and quantity.

It can increase prices without worrying about losing market share.

It limits its production to allow it to raise prices.

The price a monopolist sells at the initial production level is higher than the price it charges when it increases its production.

Marginal revenue is the price change after an increase in production.

A monopolist’s power to raise prices and limit supply results in a loss of weight.

Monopoly maximizes profit by producing where marginal revenue (MR), = Marginal cost.

Graph: Monopoly pricing and deadweight loss

Profit is maximized at intersections of the MR/MC.

The price of the monopoly is Pm, and it supplies quantity Qm.

The monopoly will increase its production if it produces less than Qm. MR is higher than MC.

QM is the maximum output that a profit-maximizing monopolist can produce.

The output Qm is less than Qc.

Deadweight loss is caused by production that falls below Qc. This reduces producer surplus and causes a reduction in consumer surplus.

Part b

Qantaslink’s exclusivity gives it a monopoly over pricing.

Because consumers don’t have a replacement service, the demand for Qantaslink’s services will not be affected by higher prices.

Yes. There are other routes that may have monopoly pricing in Australia. These include Sydney, Melbourne, Brisbane, Perth, and Brisbane.

These companies are motivated to charge higher prices, but not improve their services.


Negative externalities can be caused by smoking cigarettes.

It can cause harm to the smoker and the people around him.

The argument is that the person who smokes next to the smoker is more at risk than the smoker.

The government decides policies such as price floor, indirect tax on cigarettes and education campaigns to reduce smoking.

This paper will examine the effectiveness and efficiency of these policies.

Many economists believe that elasticity of demand is a better way to determine whether price increases will have an effect on demand.

The paper will therefore determine the level of elasticity displayed by cigarette smokers.

Part a

Graph: Indirect tax effects upon tax burden

The graph’s original equilibrium point prior to tax was P1,q1 and the tax creates an equilibrium P2,q2.

The initial equilibrium is created by the supply and demand without tax.

After tax is imposed the supply shifts to S+ tax.

The price is now very high, causing a drop in demand to q2.

The new equilibrium level is where the volume sold is lower, but the price remains high.

It is clear that the price changes are large but the demand changes are small.

This is why there is an inelastic demand of cigarettes (Sivagnanam and Srinivasan 2010, 2010).

It can also be seen that the consumer bears a greater financial burden.

This is because suppliers have the ability to raise prices without necessarily decreasing demand.

The consumers are not the only ones who bear the greatest burden, but the suppliers share a small portion.

Part b

In their analysis of Illinois’s demand for cigarettes, Kennedy, Pigott, and Walsh (2015) noted that cigarettes have an inelastic market because they are addictive.

This is why, even if prices rise, the level of consumer demand does not change.

Cordes, 2005 explains that consumers carry the most burden.

The PED would be elastic if the consumers could reduce their demand so that suppliers’ revenues drop.

It would also prohibit them raising the price in order to avoid this loss, and they would end up with the greatest burden.

Part c

A price floor policy is a price that is set at a higher price than the usual selling price so that suppliers can sell above it but not below it.

The suppliers love this policy because they can exploit the cigarette consumer and make extraordinary profits.

This policy leads to the greatest welfare losses as consumers have to pay high prices.

This stimulates the demand for cigarettes, but it also increases the supply.

Education campaigns are policies that promote awareness about the dangers of smoking cigarettes (Siong 2012).

This education program may be provided by the government using people from different health institutions.

This may be beneficial as some people smoke without fully understanding the consequences.

This campaign is designed to discourage non-smokers from engaging in this behaviour.

While both price and tax floors lead to high prices for cigarettes, education campaigns don’t impact the price.

Hart (2016) claims that a high price would make cigarettes prohibitively expensive for minors.

Tax increases can be considered the most efficient policy because the revenue received by the government is used to pay for medical services and other investments.

The tax is not evasible by consumers.

It creates a price floor that causes an oversupply, which would lead to suppliers selling to the black-market in order to increase their revenue.

Price promotions are another way to lower the minimum price (Golden and al., 2016).

People are often very ignorant so the education campaign may not work.


As it benefits the government, tax increases are the best policy. However, the high prices that result from them cannot be avoided.

The government monitoring is necessary to ensure that the price floor policy works.

While the education campaign will not reduce smoking, it may prevent some smokers from doing so.

While tax policy generates revenue, the price floor and education campaign add costs to the government. Monitoring cost is a must.

The education campaign has a longer-lasting effect than tax increases and price floors.

The effectiveness of the price floor will decrease when black-marketing starts.

The effectiveness of tax will last for the long-term.

The encyclopedia on taxation and tax policy.

Washington, D.C., Urban Institute Press.


Golden, S.; Farrelly M., Luke D. and Ribisl K. (2016).

Comparison of projected effects of cigarette price floor and excise taxes policies on socioeconomic disparities.

Sonoma County establishes a price floor for cigarettes and moves to curb minors’ sale.

Tax Increase on Cigarettes In Illinois

Kennedy, S., Pigott V., and Walsh K. (2015).

Economics of Tobacco: A Study of Cigarette Consumption in Ireland.

[Online] Statistics & Economic Research.

The Problem with Price Gouging Laws.

Harvard Business Review.

Increase in cigarettes prices.

Sivagnanam (J.) and Srinivasan (R.) (2010).

Business economics.

New Delhi, Tata McGraw Hill.

How price gouging laws can cause more destruction during natural disasters.

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