Running head: MODULE 1 CASE 1

Module 1 Case

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Module 1 Case

Part A

Question 1

If the firm spends the money it has on advertising, what happens is that there will only be

a shift in the demand curve. The change can be explained by the fact that a movement along the

demand curve is caused by a change in prices alone whereas a change in the other factors that

affect demand, including advertising, only cause a shift in the demand curve either to the left or

to the right. The direction of the shift depends on the change of the change of the factor (increase

or decrease) (Krugman & Wells, 2013).

Question 2

The situation at the furniture factory reflects a change in quantity supplied. In practice, a

change in the supply curves is occasioned by other factors other than price that affect the cost of

the supply that the business makes. In this case, the only thing that will be changing will be the

costs of the supply to be made, which is one and a half times more than the normal price.

Consequently, the only thing that is changing is the price. As a result, this will cause a movement

along the supply curve. The upward movement along the supply curve is caused by the increase

in price (Krugman, & Wells, 2013).

Question 3

When the government increases a 20% tax on the sale of marijuana, it will not result in a

20% loss in sales for a number of reasons. Firstly, considering that the industry has only one

business with no competitors, it implies that the company is operating as a monopoly, hence it

can determine its own price or quantity to supply to the market. Accordingly, this implies that

when the government imposes tax on marijuana, the company can easily transfer the burden to
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the consumers by increasing the price of the marijuana. Since consumers have no substitutes,

they have no choice and have to purchase the product at the inflated price. Therefore, the

company will not suffer any adverse effects in terms of reduced demand for the commodity since

the supplier of the product enjoys monopoly power. Accordingly, this implies that the demand

curve for the marijuana under the prevailing market structure would be inelastic since an increase

in price of the product will not have a significant impact on the quantity purchased by consumers

(Krugman, & Wells, 2013).

Part B

Question 1

QD= 1000-1.5P

QS= 50+2P

Equilibrium price is attained at the point where QD=QS

1000-1.5P= 50+2P

950=3.5P

P= 271.43

Question 2

QD= 1000-1.5P

QS= 100+2P

QD=QS

1000-1.5P=100+2P

900=3.5P

P= 257.14
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References

Krugman, P., & Wells, R. (2013). Economics (1st ed.). New York, NY: Worth Publishers.