Questions:
1. Explain why excise taxes are more effective at raising tax revenues when applied to products with price inelastic demand versus ones with price elastic demand. Under what conditions would it be possible for tax revenues to decline with higher excise taxes?
2. You operate a small but popular and profitable restaurant/bar in a college town. There are several other restaurants and bars nearby. You have conducted a market research study and discovered that the price elasticity of demand for local residents is lower (less elastic) than the price elasticity of demand for college students, who are usually in town only while the college is in session about 9 months out of the year. Discuss at least two pricing strategies you can use to increase your revenues and analyze them in terms of their ability to generate additional profits.
3. If an auction house is selling products to risk neutral buyers, which of the types of auction would you recommend? If you are a potential buyer, what might your strategy be?
4. Explain how natural monopolies cause market failure? How is the deadweight loss associated with this form of market failure measured? What is a typical form of government intervention to correct it? How effective is this type of intervention?