Think about the markets for i) brown rice and ii) luxury cars and assume that luxury cars are a differentiated product and brown rice is a homogeneous or identical product.

a) For which good would price be a more important criterion for consumers to make a buying decision? (2 marks)

b) In which market are the individual producers that produce these goods price-takers or price-setters? (2 marks)

c) Draw two models, a monopoly market for a differentiated product and a perfectly competitive market. On each of your models show the profit-maximizing equilibrium point and show any areas of consumer surplus, producer surplus and deadweight loss. Also describe what an isoprofit curve shows. Label all relevant axes, points and curves on your model. (8 marks)

d) Discuss how important advertising would be in each type of market structure (monopoly and perfectly competitive). (4 marks)

e) Assume that in the market for luxury cars the government is considering imposing a tax with a view to increasing tax revenue. Government economists have reported that a 10% increase in the price of luxury cars is expected to cause a 6% reduction in the quantity demanded of luxury cars. Based on this information what is the price elasticity of demand and what does this imply about the effectiveness of a luxury cars tax in raising tax revenue. (4 marks)