Question

The assignment that I was given is asking whether those statements are true, false or depends and to give an explanation.

1. A 5p charge for every single plastic shopping bag will not change the consumer’s demand for plastic bags.

2. Government intervention in an economy is justified due to the failure of free markets to produce an optimal supply of goods.

3. The principal-agent problem refers to asymmetric information and difficulty of supervision.

4. The most important determinant of the price elasticity of demand is the number of substitutes for the goods.

5. The higher the price of a good, the less the quantity supplied.

Answer 1

Question 1. A 5p charge for every single plastic shopping bag will not change the consumer’s demand for plastic bags.

Answer 1. Depends. The change in demand for single plastic shopping bag depends on the consumers level of income also. If the income of the consumer is too high, spending 5p for a shopping bag would not make much if a difference for the consumer.

Question 2. Government intervention in an economy is justified due to the failure of free markets to produce an optimal supply of goods.

Answer 2. True. Government sometimes has to use price floors and price ceilings to ensure that the equilibrium price and quantity are not out of proportion.

Question 3. The principal-agent problem refers to asymmetric information and difficulty of supervision.

Answer 3. True. The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. It happens mainly because of asymmetric information between the parties.

Question 4. The most important determinant of the price elasticity of demand is the number of substitutes for the goods.

Answer 4. True. If sustitues are present in the market, the seller does not have too much power and cannot raise the prices too much. Because he knows, if the prices are raised, the consumers would shift to substitutes.

Question 5. The higher the price of a good, the less the quantity supplied.

Answer 5. False. The higher the price of the good, the higher is the quantity supplied. This is because the producer is benefitted with higher prices as he is earning more for each unit of the good that he sells.