Provide step by step answer to the following questions.

. In this essay you will be asked to reflect the following issues using the supply and demand model.

1. There are two important inputs in the production of lattes: coffee beans and labor from workers at the coffee shop. a. Workers need to make a decision about how much time to spend working and how much time to spend doing other things. What factors affect the decision of a worker and how do these things affect the price of lattes? Rubric item 1. Demonstrate the knowledge of basic elements and concepts of microeconomics How does the following concepts affect price of lattes Microeconomic factors

1. Opportunity Cost

2. PPF with graph

3. Marginal cost and marginal benefit

4. Comparative advantage and absolute advantage

5. Price controls- price floor,

6. Explain with graph surplus in labor market if minimum wages is above equilibrium wages

7. Benefits, tuition and retirement plans

8. Consumer preferences Rubric item

2. Identify economic resources and their use

a. Natural resources

b. Human resources labor, education, skills

c. Technology

d. Entrepreneurship

b. Suppose a drought strikes the major coffee growing regions of Brazil. Describe the effect of the drought on the price and quantity of lattes in the context of the supply and demand model.

Explain with graph 1. Demand and supply, equilibrium price and output 2. Increase and decrease in demand 3. Increase and decrease in Quantity demanded 4. Increase and decrease in Supply 5. Increase and decrease in Quantity supplied 6. Explain Increase /decrease in supply of coffee beans due to drought with a graph 7. Effect on price and quantity demanded and supplied of coffee beans 8. Are coffee beans and latte complementary goods or substitutes 9. Cross price elasticity definition 10. Effect on price and quantity demanded and supplied of lattes

2. Now consider the local coffee market more broadly. Explain how the output decision made by a particular coffee shop differs under each of the four market structures: competition, monopoly, oligopoly, and monopolistic competition.

3 Differentiate production under pure competition, monopoly, oligopoly and monopolistic competition

1. Draw a graph. Label it and explain all types of costs i. Explain Law of diminishing marginal returns ii. Economies of scale iii. Short run and long run curves 2. In context of local coffee market, explain the features of pure competition, monopoly, oligopoly and monopolistic competition 3. Draw graphs of pure competition, monopoly, oligopoly and monopolistic competition and label it. 4. Discuss the output and price decision under pure competition, monopoly, oligopoly and monopolistic competition and label it.

How does pure competition differ from other basic market models?

The other basic market models are pure monopoly, oligopoly, and monopolistic competition. These market models differ from each other on the basis of: (1) ___________________ ; (2) the type of product; (3) control over price; (4) ________________ ; and (5) nonprice competition.

( ___________________ ) is a market structure with a large number of independent firms selling a ( standardized, differentiated ) product. The individual firms are " price ____________" and have no control over price because they must accept the market price for the product. Nonprice competition is not present because firms are selling a (homogeneous, heterogeneous) product at the market price. The conditions of entry into (or exit from) this industry are easy.

( _____________________ ) is just the opposite of pure competition in many ways. First, there is only one firm, not many individual firms. Second, the firm produces a unique product for which there are ( no, some ) close substitutes, not a standardized product that can be produced by many firms. Third, the firm has considerable control over price, and operates as a "price __________ " rather than a "price taker." Fourth, there are extensive barriers to entry into the industry and some degree of nonprice competition such as ___________________________.

( _________________ ) is more similar to pure monopoly in its operation and therefore differs markedly from pure competition. Under this, there are a few large firms that dominate an industry rather than a large number of relatively small firms. The firms can produce a standardized or a differentiated product rather than just a standardized product. Oligopolistic firms have some degree of price making power, although it is limited by the mutual interdependence in the industry. The entry obstacles are high and nonprice competition is present with oligopolies producing (differentiated, undifferentiated) products.

( __________________________ ) is the market structure that is closest to pure competition, although it differs from pure competition in several respects. Under this, competitors sell ( standardized, differentiated ) products, and therefore use ( price, nonprice ) competition along with some limited price competition to sell products. There are many monopolistically competitive firms, in part because entry conditions tend to be relatively easy, but the number of firms is substantially less than the thousands found in pure competition where the entry conditions are easier.

Now find a correct market model (or structure) for each questions below:

A one-firm industry is known as___________________.

Economists would describe the U.S. automobile industry as _______________.

Agriculture is the most close approximate of _________________.

An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of _____________________.

How would you describe the demand curve for the purely competitive firm? For the industry?

The demand curve for the individual competitive firm is ( perfectly elastic, inelastic) . The firm can sell all the output it can produce at the competitive market price because each firm accounts for only a negligible share of the market. There is no reason for the firm to lower price to sell more, nor can the firm obtain a higher price by restricting output. But, market or industry demand curve is (vertical, upsloping, downsloping ). Consumers will only purchase greater output for the entire industry at a lower price, but less output can be sold to consumers at a higher price.

Why can't an individual firm raise its price by reducing output or lower its price to increase sales volume in a purely competitive market?

One of the key reasons that an individual firm can't raise prices or decrease prices to increase sales volume is the fact that firms in a purely competitive market are "price ____________". This occurs due to the large numbers of firms in the market. As a result, individual firms face (perfectly elastic, inelastic) demand. This means that a firm can produce as little or as much as it wants and still receive the same price. Thus, the firm ( can, cannot ) raise prices by restricting output or lower prices to sell a greater level of output.

What is the difference between average, total, and marginal revenue? What is the shape of the total and marginal revenue curves for the individual competitive firm?

( ___________________ ) is the amount of money the firm receives per unit of sale. ( ________________ ) is the market price times the quantity that the firm can sell. ( _________________ ) is the change in total revenue from selling one more unit of output. The marginal revenue (MR) curve for the individual competitive firm is a ( vertical, horizontal ) straight line because there is a constant change in total revenue from selling one more unit of output. The total revenue (TR) curve is a(n) ( downsloping, upsloping ) straight line. Market price is constant and multiplied by an increasing amount of quantity sold.

Why does price equal marginal revenue for the purely competitive firm? What is the relationship to the demand curve for the firm?

The purely competitive firm is a "price-taker" in the market. The price it receives for its output is constant and does not vary across its range of output. ________ _________ is defined as the change in total revenue from selling one more unit of output. One more unit of output will be sold at a constant, market-determined price. Thus, price will be (greater than, equal to, less than) the marginal revenue (MR) for the firm. Also, the firm's demand curve will be perfectly elastic because no matter how much or how little the firm produces it will receive the same price per unit of output. So, demand (greater than, equal to, less than) price and marginal revenue (MR).

ii. Explain the questions in part iii

Part II. Answer all of the following questions: 15. This question is concerned with issues related to "tax incidence" (the study of the final burden of a tax after considering all market reactions to it). The figure below depicts the situation in a perfectly competitive market before and after the imposition of an excise tax. An excise tax is a tax on each unit of a good consumed. Initially, the long-run equilibrium price and quantity of the good in question are P, and Q1, respectively. Suppose now that the government levies an excise tax of ST per unit of output. Price N LS P 1 H Quantity When the long-run supply curve (LS) of a good has a positive slope, both consumers and firms pay a portion of the tax. The imposition of the tax shifts the market demand curve inward to D' which causes the price to fall from Pl to P2 (as some firms exit and input prices fall). The (net) price that producers receive will be equal to The price that consumers pay for the good will be equal to Tax revenue to the government will be given by area The total loss of consumer surplus is the area The total loss in producer surplus is the area The deadweight loss of the tax will be given by area (The deadweight loss is the losses of consumer and producer surplus that are not transferred to other parties.) If demand is relatively inelastic and supply is clastic, who (consumers or producers) will pay more of the tax? h) If supply is relatively inelastic and demand is clastic, who will pay more of the tax