ECO402 Assignment no 2 fall 2012

SEMESTER FALL 2012
MICROECONOMICS (ECO402)
ASSIGNMENT NO. 02
DUE DATE: 28TH JANUARY 2013
MARKS: 20

ASSIGNMENT

The Case:

Solar energy is becoming more popular with the passage of time. Due to increasing demand of power, solar energy has become an active alternative in the power sector. Chinese company “Suntech Power” is the largest producer of solar products. Suppose, being the largest producer in the area, the said company has become monopolist in the market.
Higher demand of solar
products from last few years has attracted few other companies to enter into this market, which in turn has affected market share of Suntech Power. Further, Chinese government has imposed heavy tax on the production of solar energy products. As a result, marginal cost of solar product was increased to Rs.6000 million and the elasticity of demand for solar products after imposition
of tax was -4. To analyze the company’s standing in present situation and to take production decisions, the company has called meeting of economic advisors. The economic advisors collected the company’s data and formulated few questions in order to analyze the given situation. On the basis of the answer of these questions, they would be able to take the production decisions. Data on price, quantity and total cost is given in the following table;

Price                                                  Quantity                                              Total Cost
(Million                                             (Units)                                                       (TC)
Rupees)

2000                                                        100                                                  100,000

3000                                                        300                                                  400,000

3500                                                        400                                                  900,000

3200                                                        450                                                  11,00,000

2800                                                        500                                                  13,50,000

Requirements:

Being a student of economics, you are required to answer following questions by using the above information.

A. Calculate marginal revenue and marginal cost of Suntech power.

B. What is the maximum output that the producer of Suntech power would ever produce?

C. Under the given situation, what would be price of solar product after the imposition of heavy tax?


D. Should this company supply output at price calculated in part C? Give answer with economic reasoning.

E. Suppose this company has produced 400 units. At this output level, should this company increase production, decrease production or leave output unchanged in order to maximize its profits?
(Marks Part A=4+4, Part B= 2, Part C=5, Part D=3, Part E=2)