Objectives
This assessment item relates to course learning outcomes 2 and 3 as listed in the Unit profile.
Q1. Market structures
(a) Why are perfectly competitive firms' price takers?
(b) Why do perfectly competitive firms' always make normal profits in the long- run? Illustrate and explain with an example of a firm under perfect competition.
(c) Why do firms under prefect completion have short-run supply curves that slopes upwards? Illustrate and explain.
Q2. Market structures
(a) Explain with reasoning as to why the governments all over the world allow monopoly firms to continue the supply of water and transmission of electricity.
(b) What are the legal, technical and economic sources of barriers to entry? In each case, give examples and explain how each of these barriers protects the established producer.
Q3. Market structures
(a) What conditions allow a monopolistic firm to price discriminate? Give example and illustrate first and third degree price discrimination.
(b) In Table-1 below, an oligopolistic firm faces two demand schedules. The current price is $185. Study the table and answer the following questions:
(i) Plot the marginal revenue curve corresponding to the kinked demand curve and explain.
(ii) Given that, Marginal Cost is $150 at every level of output. Copy the table and calculate TR and MR.
(iii) Determine the profit- maximizing level of output and plot on the graph.
Table 1
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
Competitors Quantity Demanded
|
Price ($)
|
Total Revenue Column
1x2
|
Competitors follow:
Quantity Demanded
|
Total Revenue Column
(follower)
|
Marginal Revenue (MR)
|
Marginal Cost (MC)
|
|
20
|
200
|
4000
|
35
|
|
|
150
|
|
30
|
195
|
5850
|
40
|
|
|
150
|
|
40
|
190
|
7600
|
45
|
|
|
150
|
|
50
|
185
|
9250
|
50
|
|
|
150
|
|
60
|
180
|
10,800
|
55
|
|
|
150
|
|
70
|
175
|
12,250
|
60
|
|
|
150
|
Q4. Market Failure and Externalities
This question covers the market failures and government policy topic presented in Chapter 7 of the prescribed text.
(a) Assume that a firm discharges waste into a river. As a result, the marginal social costs (MSC) are greater than the firm's marginal (private) costs (MC). The table below shows how MC, MSC, AR and MR vary with output. Assume that the marginal private benefit (MB) is given by the price (AR). Also assume that there are no externalities on the consumption side, and that therefore MSB = MB. Study the table and answer the following questions.
|
Output
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
|
MC
|
23
|
21
|
23
|
25
|
27
|
30
|
35
|
42
|
|
MSC
|
35
|
34
|
38
|
42
|
46
|
52
|
60
|
72
|
|
TR
|
60
|
102
|
138
|
168
|
195
|
219
|
238
|
252
|
|
AR
|
60
|
51
|
46
|
42
|
39
|
36.5
|
34
|
31.5
|
|
MR
|
60
|
42
|
36
|
30
|
27
|
24
|
19
|
14
|
(i) How much will the firm produce if it seeks to maximise profits?
(ii) What is the socially efficient level of output?
(iii) How much is the marginal external cost at this level of output?
(iv) What size of tax would be necessary for the firm to reduce its output to the socially efficient level?
(b) Consider the following externalities, and explain if there would be external effects associated with any of the following activities, and if so, what would be the nature of the externality in each case?
(i) Population is vaccinated for polio, influenza or swine flu.
(ii) Single use plastic bags litter our environment, rivers and seas.
(iii) Can you think of government policies that might deal with each of the above two external effects of negative externality?