Checked by:
David Spiers
Question 1:
Which of the following are likely to be fixed costs and which variable costs for a chocolate factory over the
course of a month? Explain your choice:
(a) The cost of cocoa (1 mark)...........................................................................................................................
(b) Business rates (local taxes).(1 mark)...........................................................................................................
(c) An advertising campaign for a new chocolate bar. (1 mark)........
(d) The cost of electricity (paid quarterly) for running the mixing machines (1 mark)..
(e) Overtime pay (1 mark)..................................................................................................................................
(f)
The basic minimum wage agreed with the union (workers must be given at
least one months notice if they are to be laid off) (2 marks)........................................................................
Interest on a mortgage for the factory: the rate of interest rises over the
course of the month (1 mark).......................................................................................................................
Question 2:
(a)
Complete the following table of costs for a firm. (Note: enter the figures in the MC column between
outputs of 0 and 1, 1 and 2, 2 and 3, etc.) (6 marks)
Output (Units)
TC ($)
55
85
110
130
AC ($)
MC ($)
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40
42
280
90
110
8
9
610
150
10
(b)
(c)
(d)
(e)
Question 3:
Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans, and
each firm believes its rivals will not follow its price increases but will follow its price cuts.
Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that
firms in the jeans industry do or do not compete against one another?
(5 marks for the correct demand curve and 5 marks for the correct explanation)
Question 4:
a
Illustrate and explain using a diagram, the impact of external costs and external benefits on resource
allocation; (2.5 marks)
Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)
(c) Which of the following are examples of public goods (or services)? Delete the incorrect option
(1 mark each).
(i)
(ii)
Pencils
(iii)
................................................................................................. Yes/No
..................................................................................................................... Yes/No
............................................................................................... Yes/No
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(iv)
(v)
Contact lenses
.......................................................................................... Yes/No
......................................................................................................... Yes/No
Question 5:
a
Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income
elasticity of demand for a cabinet makers work is +0.4. Compare the impact on pre-recorded music
compact disks and the cabinet makers work of a recession that reduces consumer incomes by 10 per
cent. (2 marks)
How might you determine whether the pre-recorded music compact discs and MP3 music players are in
competition with each other? (2 marks)
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= +0.5 and YED= -2.5
(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= + 0.64 and XED= -2.6
Question 6:
You are given the following data about two firms:
FIRM A
Quantity
10
20
30
40
50
60
___
___
___
___
___
___
___
___
30
___
42
___
___
50
___
___
60
___
___
76
___
___
100
___
140
___
___
___
___
___
___
___
FIRM B
Quantity
100
134
154
177
216
266
366
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___
140
___
___
___
130
___
___
___
___
120
___
___
___
___
110
___
___
___
___
100
___
___
Are these firms operating in the short or the long run? (1 mark)
(c)
(d)
What level of output will these firms produce in the short run?
(2 marks)
___
90
80
___
___
___
___
___
___
Firm A:.........................................................................................................................................................
Firm B:.........................................................................................................................................................
Question 7:
a Discuss the following statement: In the real world there is no industry which conforms precisely to the
economists model of perfect competition. This means that the model is of little practical value. (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 for diagram and 2.5 marks for explanation)
c Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm
(2.5 marks).
Question 8:
(2 marks each, 1 for explanation and 1 for the diagram)
Using supply and demand analysis, explain and illustrate graphically the effect of the following situations.
a
The government is paying a $1 per unit subsidy for each unit of good Y produced.;
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a Explain and illustrate using a diagram why a monopolist would never produce in the inelastic range of
the demand curve. (3 marks for explanation, 3 marks for diagram)
b In each of the following cases, state whether the monopolist would increase or decrease output:
i
(ii) Marginal cost exceeds marginal revenue at the output produced. (2 marks)
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