Question 1:
Suppose you are given the following:
At output level of 6, what will be the marginal cost?
Less than 2
Exactly equal to 2
More than 2
Given information is not enough to find out marginal cost
Why is this?
Question 2:
What explains the U-shape of the AC curves in the short and the long run?
Shapes of both, short and long run AC curves, are explained by the law of diminishing returns
Law of diminishing returns explains the long run AC curve while economies and diseconomies of scale explain the short run AC curve
Law of diminishing returns explains the short run AC curve while economies and diseconomies of scale explain the long run AC curve
Shapes of both, short and long run AC curves, are explained economies and diseconomies of scale
Explain
C. The U-shaped curve in the short run can be explained by law of diminishing returns. In the short run, the costs increase slowly than the output. Provided the average total cost is higher than the marginal cost, the average cost of production will be on the decline. However, the law of diminishing return dictates that it will reach a point where the marginal cost will be higher than ATC which also means that the AC will increase creating the shape. In the long- run, the curve is also u-shaped but for a different reason. The curve represents an increase in economies of scale followed by constant returns and finally diseconomies of scale on the positive slope side.
Question3:
Suppose you are given the following:
Using the MC=MR rule, what is the output level at which profit is maximised?
A. Output level 4
B. Output level 6
C. Output level 7
D. Output level 5
Explain why this is so
C. This because at that output level TR will be higher than TC, TR>TC. That is, TR will have covered all the costs of operations and the firm will remain with additional revenue which is known as the economic profit. It is also at this level that the firm will have the highest economic profit.
Question 4:
The kinked demand curve faced by an oligopolist has the following characteristic:
Equal elasticity of demand above and below the kink
High elasticity of demand above the kink and low elasticity of demand below the kink
Low elasticity of demand above the kink and high elasticity of demand below the kink
Low elasticity of demand right across the curve
Explain
B. The model is based on the assumption that a firm will experience higher price elasticity above a particular price level and lower price elasticity below that particular price level. This discourages the firms to compete on the basis of price. This leads to a situation of interdependence where the few firms in the market depend on one another.
Question 5:
The most essential characteristic that distinguishes monopolistic competition from all other market structures is:
A. Large number of buyers
B. Large number of sellers
C. Downward sloping demand curve
D. Product differentiation
Explain. Give an example.
D. Since the monopolistic market comprises of a large number of independent sellers who are selling almost similar products, the primary means of competition for consumers is to have differentiate products. A good example is the toothpaste industry. There are numerous sellers in the market selling this products which does more or less the same thing. Therefore, the primary differences come in the form of packaging or taste.
Question 6:
Two customers go to the fish counter at a supermarket to buy some fish. Neither looks at the price.
Customer A orders 1 kilo of fish.
Customer B orders £3 worth of fish.
What is the price elasticity of demand of each of the two customers?
Customer A price elasticity = zero; Customer B price elasticity = -1
Customer A price elasticity= -1; Customer B price elasticity = zero
Both customers have price elasticity of -1
Both customers have price elasticity of zero
Explain
A. This is because customer A’s demand for fish is not influenced by the price. He or she just wants to get 1 kilogram of fish no more no less, no matter the price. For customer B, he or she orders the fish putting into consideration the amount of fish. Thus, if the price of the fish is higher by 5% the customer will have to take 5% less fish.
Question7:
A company's total revenue will rise if price:
falls and demand is unitary
falls and demand is inelastic
rises and demand is inelastic
rises and demand is unitary
Why? Present a numerical example
C. When demand is inelastic it means that the change in quantity demanded is lesser for a particular change in price. For example, if a price increases by 30 percent the corresponding contract in demand may be way lesser, maybe 5%. This way the firm can be able to increase the total revenue collected by raising the price level.
Question 8:
The cross-price elasticity between a pair of goods has been found to be +2.5. These goods are:
A. Luxury goods
B. Substitute goods
C. Complimentary goods
D. Necessary goods
Explain with an example.
B. When the price of one good increases the quantity demanded for the other good also increases. This means that customers can switch from one product to the other and still get the same amount of utility. For example, the market of carbonated drinks has players such as Pepsi and Coca-Cola. Both Pepsi and Coke satisfy similar customer needs. Thus of Coke’s price goes higher by a significant margin consumers will happily switch to Pepsi with no complains.
Question 9:
The main difference between a monopoly and a natural monopoly is:
Natural monopoly must be regulated but monopoly need not be so
Natural monopoly is created by the government while monopoly emerges as a result of market forces.
Natural monopoly will have continuously decreasing average costs while a monopoly will have a U-shaped average cost curve.
There is no essential difference between natural monopoly and monopoly
Explain.
A. A natural monopoly needs to be regulated by the government since it hardly achieves the needed efficiency. The intervention is required in order to regulate prices and improve the process of resource allocation. On the other hand, a monopoly can regulate itself since it is not after increasing prices but maximizing on profits. Hence a trade-off needs to be created between price and quantity.
Question 10:
A demand relationship in which the percentage change in demand is equal to the percentage change in price is:
unitary elastic
inelastic
elastic
perfectly elastic
Explain.
A. This is the case where a 10% increase in price will also result in 10% decline in quantity demanded and vice versa.
Question 11:
Discuss your understanding of microeconomics and the main building blocks (concepts) that make up microeconomics. You may use one or two examples to support your understanding of the key concepts that make up microeconomics. (Your answer should not exceed 200 words)
Microeconomics is a social science that intends to outline the relationship between households, individuals and firms. It is based on the premise that human and decisions affect the distribution and utilization of resources. The study of human behaviour also shows why some goods are valued more than others and what leads to such as a situation. It also intends to describe what might happen to a firm or industry when factors of production change. A simple example is that when a car manufacturer raises the price of the vehicles, consumers will tend to purchase less of the products. Key concepts in microeconomics is market structures, supply and demand, and elasticity of demand, income levels and profit maximization. Market structures can help an investor understand what affects prices and performance of companies in particular industries. For example, an investor can be able to identify factors that would result in an increase or decrease in Apple’s share price and invest accordingly (Taylor and Mankiw 41).
Works Cited
Taylor, Mark and Mankiw, Gregory. Economic. Boston: Thomson Learning, 2014.
