Question

“As a global pandemic causes a fall in consumer confidence and difficulties in the supply of product X, the price of product X will definitely rise”. True/False/Uncertain. Explain.

‘Consumers bear a greater portion of tax incidence when demand is inelastic.’ True/False/Uncertain? Explain.

In monopolistically competitive markets products are identical and entry is free. True/False/Uncertain. Explain.

Answer 1

1. A fall in Consumers confidence will decrease demand for product X, shifting the demand curve leftward. As a result, equilibrium price of the product decreases.

Difficulties in the supply of product X shifts the supply curve leftward. As a result, equilibrium price increases.

As a combined result of these two events, effect on the equilibrium price is undetermined. It may increase or decrease based on the magnitude of the shifts.

Answer: False

2. Tax burden falls more heavily on the less elastic portion of the market because when price increases because of the tax they can't leave the market easily and pay the higher price.

Answer: True

3. In monopolistically competitive market, each firm produces differentiated products and therefore each firm has some market power. But other firms can freely enter or exit the Industry.

Answer: False