Microeconomy

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Posted on February 22, 2022

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Question 1

Apple which is produced in Germany and banana which is imported from South America are substitutes in German fruit market. German government decided to drastically increase the tariff for banana imports, while the apple production in Germany faces strong increases in labor costs. In addition, German households expect a slight decrease in income. Indicate what will happen to the equilibrium price and the equilibrium quantity of both “apple” and “banana” markets? Illustrate it on the graphs.

Question 2

“Runners.ltd” produces sport shoes and operates in a monopolistically competitive market. The company “Runners.ltd” invested a substantial amount of money in advertising and creating its own brand.

– Define the main features of the monopolistically competitive market and how it affects the firm’s decisions.

– What did “Runners.ltd” possibly gain from their expensive advertising? Discuss how it possibly affected demand for its shoes and the firm’s costs.

– Discuss advantages and disadvantages of the monopolistically competitive market. Is it efficient?

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