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ECO402 Microeconomics GDB 2 Solution Fall 2012

Handicrafts of Pakistan are famous for their uniqueness, assortment and quality standards and therefore have established its status within and outside the country. From last few years, handicraft business has flourished remarkably due to high demand of handicraft products like floor coverings, antiques, decorative items, furniture, garments, home furnishing etc. These products can be made from wood and also from synthetic material. High demand attracts many firms to enter in this market. Few firms have started business in urban area while others have established business in rural area. Suppose, Waqar group of industries, a new entrant in handicraft industry, starts business in rural area. This industry manufactures handicrafts from pure wood. Handicraft manufacturing through synthetic material leads to environmental degradation. That’s why environment ministry has imposed a tax on the handicraft industry involved in manufacturing of all kinds of synthetic products.

Requirements:

Keeping in view the above scenario, give answers of following questions with proper reasoning.

  • How would imposition of tax on synthetic products affect Waqar group of industries in particular and overall handicrafts industry in general?
  • Given that Waqar group of industries is working in rural area, which economic benefits this industry would get in the long run? Give answer by using concepts of long-run production and cost theory.

IDEA Solution:
1-Waqar Group is working in Rural area so maybe the percentage of TAX will be low,however tax will not effect of supply or demand.But it will effect on price.

2-Ecnomic Benifit will be low cost Labour.

Tax is imposed on synthetic products, Waqar group is using pure wood, tax should not effect Waqar group directly. If they are using some synthetic material, it would effect but very less or minor.

The rural area, government gives reduced tax packages. Raw material (wood) is cheap and easily available  Labor cost will be less. Less cost of raw material transportation. Waqar group can operate as cost reduction industry and get benefits of low cost production.


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