Question 1

(a) The daily demand for movie rental from a movie theatre operator Silver Screen is given by the equation P = 5 - 0.5Q, where P is the price in dollar ($) and Q is the quantity demanded. The manager of Silver Screen claims that consumers are always sensitive to the price of movie rental and hence the company should always reduce the price to earn more revenues. Is this claim valid? What should the manager do to maximise the revenue? Explain.

(8 marks)

(b) "A minimum wage can never increase both wage and employment in the labour market". Discuss the validity of the statement and support your answer with a suitable labour market diagram. Is there a way to increase both wage and employment? Explain.

(8 marks)

(c) Consider a producer who faces a linear demand curve P = 24 - Q, where P is the price in dollar ($) and Q is the quantity demanded. The producer produces this good at a constant average and marginal cost of $6. Determine the price and quantity if the producer wishes to maximise profits. Suppose the government imposes a tax of $T per unit on the producer. How much will the consumer bear the tax burden? Explain.

(9 marks)