Imagine that it is the year 2199 Technology has progressed a

Imagine that it is the year 2199. Technology has progressed at an incredible pace. The latest discovery is the plutonium engine, which is capable of converting plutonium, a by-product of nuclear fission, into fuel to power the nuclear reactors in our new form of transportation, the rocket-car. However, because the firm that invented the engine, the Futures Unlimited Corporation, already has a government license to control and distribute the quantity of this certain isotope of plutonium on the market, it is now conceivably in charge of a monopoly on plutonium-fueled transportation.

1. Describe the economic outcome of this single-price monopoly in terms of profit. Provide one (1) supporting fact to support your response.

2. Describe one (1) way that the Futures Unlimited Corporation makes output and price decisions.1

Solution

Single Price Monopoly:-

Single price monopoly means that there is only one supplier of that good so he can control the price according to his need. Price will be set by the supplier on his conditions and people have to buy because there is no alternative option. So due to this advantage the supplier will set high prices to achieve a good profit result. This will affect the economy badly because the supplier will be offering so much high prices; hence more money will float in market and will be gone to one hand. People have to suffer from this problem and pay the amount suggested by the supplier and the profits of the supplier will increase hugely. Suppose the fuel reserves are in the hand of one supplier only and he is offering $5 per liter instead of current market price so the people have to purchase the petrol for $5 per liter because it is essential for them to travel from place to place, so in this way this single price monopoly effects the economy and profit.

Decision for Output and Prices:-

As the Futures Unlimited Corporation only has licensed of distribution that isotope, so they will suggest the prices very high and according to their required profits. Output will be created according to the demands of the people and this will be huge because this company will only supply so one supplier and lots of purchaser, so the huge demand will come to this company. They will first launch few isotopes with their desired prices then after when demands increases and come to them then they will produce more output according to that demand.

Tariff and Quota on Imports.-

Tariff on imports means that the government will impose taxed on the imports from outside the country while the quota system is that the government will put restriction on the import in quantity or money.

Tariff will be more beneficial for public because if they want to purchase some items from abroad so they can purchase and pay tax accordingly but they have to pay huge amounts of taxes as compared to quota system. In quota system there will be no taxes on the imports but only the amount of import will be restricted, so will be beneficial for those who want to purchases from abroad under the limit imposed by the government because if government has adopted the tariff system then this level of people have to pay taxes unnecessary as they do not have to pay in quota system. So it depends upon the volume of the import for every individual/ consumers that which method is good for them, for some individuals the tariff will be beneficial and for some the quota system. Suppose an individual wants to purchase 5000 kg of rice for $100000 from outside country and currently the government is following the tariff policy and the tax on import is 50%, so that individual has to pay $50000 as tax but if the company has adopted the quota system and the limit for the import is $200000 for individuals, so in that case this individual would have saved $50000 which he has paid as tax in tariff system.

Opportunity Cost:-

Opportunity cost is the loss of revenue from the activity which is not performed because of another activity which is performed instead. Opportunity cost of Russia will be the loss of revenue that it will earned from 20 gloves which it will not make because it will be making 80 hats and if it will make 20 gloves then the loss of revenue due to not making 80 hats will be the opportunity cost. Likewise the opportunity cost of the Panamá will be the loss of revenue due to not making 90 hats because it will make 180 gloves at that time, similarly if 180 gloves are not produced and 90 hats will be produced so the opportunity cost will be loss of revenue from 180 gloves. All the above facts are bases on the assumption that both the countries are unable to produces gloves and hats at the same time due to their reasons like lack of investment or lack of machine hours or labors etc.

Decision to Trade:-

For the above facts, if both countries can trade between them and that trading cost results in benefit which means that the revenue will be more by selling the imported items, so then the companies must trade and enhance their profit because currently they can only make one item at a time. But if the trading cost is more than the revenue, so it will be unwise to do trading between these two countries. Suppose, Russia makes hats and imports gloves, the gloves will be sold for $10000 and the trading cost of that gloves will be $7000, so then it will be wise enough to trade that gloves from panama but if that trading cost exceeds to $12000 then it will be unwise to trade that gloves from panama because it will result in a loss of $2000.

Checking accounts are the accounts at financial institution which are used for deposits and withdrawals of cash. In this account the cash deposit and withdrawals are very frequents and these withdrawals could be done by check, ATM, Debits cards etc. The supply of money doesn’t change due to the deposit of cash in these accounts because these are the money of the general public and they are only saving their money in the accounts , no new money is generated by these deposit so no supply of money increases. These money could be taken by any account holder at any time, so banks cannot invest the money of checking account for long-terms, so in long term these cash deposit does not changes the money supply.

Banks can only use this money in short for their investment purposes and generate profits on that, in this way the supply of money could be created because by the help of customer’s money the bank has increased the money.

Writing of Checks:-

Writing of checks does not change the money supply because this is not involving any money in real. The transaction is done on paper only and the amounts are transferred on books only to their relevant accounts. No real money like cash is involved and only the figures are adjusted by banks of the individuals in their records. Suppose a person owes $100 to another person and he pays this amount by writing a check to that person and then that person takes that check and deposit it into his accounts, so in this case no real money gets involved only the amounts will be deduced and added from and to the individuals accounts, no cash is given or taken from either party.

Money Multiplier and Reserves Ratio:-

Money multiplier is the tool which describes that the maximum amount of the commercial bank money which can create by the money of central bank. It states that the threshold to commercial bank to extend their loans. While the reserves ratios is the required amount of money that every bank needs to deposited to central bank of the country in order to save the customers of that commercial bank because if due to some reasons the bank liquidates or get closed then this reserve at central bank will be used to pay the customers. The ratio is always less than the

reserve ratio because the United State Government does not allow commercial loons so frequently or due to some other reasons.

Keynesian Economic in Short Run:-

Keynesian Economic theory states that the government should intervene in the economic policy to stabilize the situation of the economy and to obtain an optimal economic performance. This theory can be good for short run due to the changes in the economy but in long run this theory cannot be good because the people needs freedom to perform good. Continuous intervention of the government will decorate the market conditions and the businessman will leave the market. In short run the flexible wages and prices are favored because by adjusting the price and wages, the demand can be balanced and unemployment could be controlled.

Classical Economic Theory:-

Classical economic theory states that the market should be free from any interventions; market will itself reach an equilibrium state. They believe that the supply will create its own demand and they also believe that the saving and investment should be equal based on the assumption that interest rates will be flexible will maintain equilibrium. This theory is good for long run because every individual who resides in market wants freedom to operate in market, so if there is no intervention from government then the market will be smooth for them and they will continue their operations. It is good to handle the deficit and prices for a short period of time but on continuous basis it will irritate the individuals.

Graph A, B and C:-

In graph A there are two points namely point a and point b, point a describes that the aggregate demands is equal to the aggregate supply in short run and point b states that the aggregate demand is equal to aggregate supply in short run . The aggregate demand and supply is affected by the unemployment rate because when the unemployment rate goes beyond the natural rate then the performance of the economy decrease which will ultimately affect the demand and supply.

In graph B, the demand and supply of money is described by the help of curves. The curves are vertical because the supply of money is determined by the government without considering the value of money. The demand of money is created by the consumers because if the goods and services are costly then the consumer will require more money to purchase those goods and services, but if those goods are cheap then the less demand of money will be created by the consumers because they will not be requiring more money to purchase.

In graph C, the rate is falling so the investment is also decreasing which is clearly evident from the curve which goes downwards as the rate decreases. This happens when the economy falls down because as the economy falls down the rate decreases and ultimately the investment will be decreased.