Introduction to Microeconomics (3) - Essay Example

a) For the Government to achieve price discrimination where a litre of petrol will be sold at different prices in different markets it means that price elasticity of demand must be different in all the sub-markets. price changes will depend on the elasticity of demand MR = P (1-1/e) At equilibrium MR=MC P (1-1/e) = MC but MC after tax = c + ti. Where the demand curve is downward sloping and the price of petrol rises to 3 per litre then the market demand is less elastic.

This makes the government charge a higher price of 3 as compared to other markets.ii. By paying a price of 3 after tax the consumer bears relatively more of the burden of paying tax. Mc Mc P = price b4 taxPt = price after taxC+ t= Mc after taxQ= Qty by taxQt= Qty after taxb) i. The price paid by consumers will remain at 2 per litre after tax is imposed since elasticity of demand will be the same in both markets ( prior to introduction of tax and afterwards)ii. In this scenario the producer will bear a relatively large burden of paying tax since the price of the product will not go up.iii. c) i.

If price of petrol paid by consumers rises to 2.75 it means that the market demand is more elastic than the market selling petrol at 3 per litre. The market whose demand is more elastic will have a low price charged.ii. The consumers will bear relatively more of the tax burden since he will be paying 0.75 higher than their previous pay.iii. d) i. For the price of petrol paid by the consumer to raise to 2.75 it means that the elasticity of demand in this market is more than in all other markets.

The market with a more elastic demand translates to a low price being charged.ii. At this point the producer will suffer a relatively more burden of tax since the compare will pay less for the one litre of petrol as compared to the other markets.iii. QuantityReferencesBrumo, M. and Sachs, J. (1985): The economics of worldwide stagflation, Cambridge Havard University Press Dominick, S. (1995): International Economics, New Jersey, Prentice hallHanson, J. (1997): A text book if Economics, London, Macdonald and EvansMalcolm, G. (1987): Economics of development W.W. Norton & company Ltd, LondonPhilip, H. (1990): An introduction to modern Economics, London, Longman group