Business economics
The diagrams should be provided where necessary and
explanation should be provided as each part carries marks
thanks
Question 1:
(a)
Explain
the impact of external costs and external benefits on resource allocation; (2.5
marks)
(b)
Why are
public goods not produced in sufficient quantities by private markets? (2.5
marks)
(c) Which of the following are, or are not examples of public goods (or
services)? Please explain your reason.
(1 mark each which includes ½ marks for
each reason).
(i) The Judicial system ……………………………………………………………………………………….. Yes/No
(ii) Pencils ………………………………………………………………………………………………………. Yes/No
(iii) The quarantine service ………………………………………………………………………………………. Yes/No
(iv) The Great Wall of China
………………………………………………………………………………… Yes/No
(v) Contact lenses ……………………………………………………………………………………………… Yes/No
Question 2:
(a)
Suppose
the income elasticity of demand for pre-recorded music compact disks is +5.0
and the income elasticity of demand for a cabinet makerâs work is +0.5. Compare the impact on pre-recorded music compact
disks and the cabinet makerâs work of a recession that reduces consumer incomes
by 10 per cent. (2 marks)
(b)
How
might you determine whether the pre-recorded music compact discs and MP3 music
players are in competition with each other? (2 marks)
(c)
Interpret
the following Income Elasticities of Demand (YED) values for the following and
state
if the good is normal or inferior; (3 marks total, 1.5
marks per part)
YED= +0.7
YED= -3.4
(d) Interpret
the following Cross-Price Elasticities of Demand (XED) and explain the
relationship between these goods. (3 marks total, 1.5 marks per part)
XED= + 0.75
XED= -2.5
Question 3:
You are given the
following data about two firms:
FIRM A
Quantity
0
1
2
3
4
5
6
Total revenue ($)
0
10
20
30
40
50
60
Average revenue ($)
___
___
___
___
___
___
___
Marginal revenue ($)
___
___
___
___
___
___
Total cost ($)
30
42
50
60
76
100
140
Marginal cost ($)
___
___
___
___
___
___
Average cost ($)
Â¥
___
___
___
___
___
___
FIRM B
Quantity
0
1
2
3
4
5
6
Total cost ($)
100
134
154
177
216
266
366
Average cost ($)
Â¥
___
___
___
___
___
___
Marginal cost ($)
___
___
___
___
___
___
Price ($)
140
130
120
110
100
90
80
Marginal revenue ($)
___
___
___
___
___
___
Total revenue ($)
___
___
___
___
___
___
___
(a)
Complete the two tables above. (4 marks)
(b)
Are these firms operating in the short or the long run? (1
mark) Firm A: short run / long run
Firm B: short run / long run
(c) Are these firms operating under perfect or imperfect competition? Firm A: perfect / imperfect
(1 mark) Firm
B: perfect / imperfect
(d) What level of output will these firms produce in the short run? Firm A:…………………………
(2 marks) Firm
B:…………………………
(e)
How would you describe their profit positions? (2 marks)
Firm A:…………………………………………………………………………………………………………………………….
Firm B:…………………………………………………………………………………………………………………………….
Question 4:
(a)
Suppose you own a coffee shop. List some of the fixed inputs and variable
inputs you would use in operating the shop.
(4 marks)
(b)
Baubles and Beads manufacturing produces 100 pendants per
day. The total fixed cost for the plant
is $4000 per day and the total variable cost is $13,000 per day. Calculate the average fixed cost, average
variable cost, average total cost and total cost at the current output level.
(4 marks)
(c)
An owner of a firm estimates that the average total cost is
$6.71 and the marginal cost is $6.71 at the current level of output. Explain the relationship between this
marginal cost and average total cost figures.
(2 marks)
Question 5:
(a)
Discuss the following statement: âIn the real world there is no industry which
conforms precisely to the economistâs model of perfect competition. This means that the model is of little
practical valueâ. (2.5 marks)
(b)
Illustrate
with a diagram and explain the short-run perfectively competitive equilibrium
for both (i) the individual firm and (ii) the industry; (2.5 marks each)
(c)
Illustrate with a diagram and explain
the long-run perfectly competitive equilibrium for the firm (2.5 marks).
Question 6:
(a)
Explain the concept of a concentration
ratio. Is the concentration ratio in a
monopolistically competitive industry likely to be higher than for a perfectly
competitive industry? Explain your
answer (6 marks)
(b)
Suppose the minimum point on the
Long-run Average Cost (LRAC) curve of a soft drink firmâs lemonade is $1 per
litre. Under conditions of monopolistic
competition, will the price of a litre bottle of lemonade in the long-run be
above $1, equal to $1, less than $1 or impossible to determine. (2 marks)
Illustrate
your answer using a diagram (2 marks)
Question 7:
What
will happen to the equilibrium price and quantity of butter in each of the
following cases? Illustrate with a
diagram and explain whether demand or supply (or both) have shifted and in
which direction. (In each case, assume ceteris paribus).
(a)
A rise in the price of magarine; (1 mark)
(b)
A rise in the demand for yoghurt; (1 mark)
(c)
A rise in the price of bread; (1 mark)
(d)
A rise in the demand for bread; (1 mark)
(e)
An expected rise in the price of butter
in the near future; (1 mark)
(f)
A tax on butter production; (2.5 marks)
(g)
The invention of new, but expensive,
process for removing all cholesterol from butter, plus the passing of a law
which states that all butter producers must use this process. (2.5 marks)
Question 8:
The diagram below illustrates a firm under monopolistic
competition.
(a) Label
the following curves: Curve I, Curve II, Curve III, Curve IV (1 mark)
(b) Does
the diagram represent the short-run or long-run position? (1 mark)
(c) Is
P3 the long-run
equilibrium price? Explain your answer.( 1 mark)
(d) What
are the profit maximising output and price? (1 mark)
(e) On
the diagram, shade in the amount of profit made at the maximum-profit output (2
marks).
(f) Draw
new average and marginal revenue curves on the diagram to illustrate the
long-run equilibrium that will occur after the entry of new firms into the
industry (2 marks)
(g) Explain
the relationship between the AC, MC, ARand MR curves at this long-run equilibrium
position?
(2 marks)
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