Final Exam (Answer) : ECO1132 (Fall-2020)

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 13

FINAL EXAM (ANSWER)

ECO1132 (Fall-2020)
0

Set: A
Page

Microeconomics

Saif Hasan Anto


2020010000119@seu.edu.bd
Part:A
Answer of 1.

Variable cost:

Variable costs are costs that change as the quantity of the good or service that a business
produces changes. Variable costs are the sum of marginal costs over all units produced. They can
also be considered normal costs.

Fixed cost:

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or
services produced or sold. Fixed costs are expenses that have to be paid by a company,
independent of any specific business activities.

A monopoly is a specific type of economic market structure. A monopoly exists when a specific
person or enterprise is the only supplier of a particular good. As a result, monopolies are
characterized by a lack of competition within the market producing a good or service.
1

Monopoly: The graph shows a monopoly and the price (P) and change in price as well as the
Page

output (Q) and output change

Answer of 2.

Characteristics of a Monopoly

A Monopoly can be perceived by specific attributes that put it beside the other market structures:
a)Profit maximizer: a restraining infrastructure amplifies benefits. Because of the absence of
rivalry a firm can charge a set cost above what might be charged in a serious market, along these
lines augmenting its income.

b)Price maker: the imposing business model chooses the cost of the great or item being sold. The
cost is set by deciding the amount to request the cost wanted by the firm (expands income).

c)High hindrances to section: different venders can't enter the market of the syndication.

d)Single merchant: in a restraining infrastructure one dealer creates the entirety of the yield for a
decent or administration. The whole market is served by a solitary firm. For viable purposes the
firm is equivalent to the business.

e)Price segregation: in an imposing business model the firm can change the cost and amount of
the great or administration. In a flexible market the firm will sell a high amount of the great if the
cost is less. In the event that the cost is high, the firm will sell a decreased amount in a flexible
market.

A duopoly is a kind of oligopoly where two firms have predominant or selective authority over a
market. It is the most ordinarily contemplated type of oligopoly because of its effortlessness.
Duopolies offer to buyers in a serious market where the decision of an individual purchaser can
not influence the firm. The characterizing normal for both duopolies and oligopolies is that
choices made by venders are subject to one another.
2
Page

Qualities of duopoly

a)Existence of just two venders

b)Interdependence: if any firm rolls out the improvement in the cost or special plan, different
structures additionally need to consent to it, to stay in the competition.
c)Presence of restraining infrastructure components: insofar as items are separated, the
organizations appreciate some syndication power, as every item will have some steadfast clients

There are two famous models of duopoly, Cournot's Model and Bertrand's Model.

Answer of 3.

Consumer surplus and producer surplus

Definition of Consumer Surplus

This is the difference between what the consumer pays and what he would have been willing to
pay.

For example: If you would be willing to pay £50 for a ticket to see the F. A. Cup final, but you
can buy a ticket for £40. In this case, your consumer surplus is £10.

Definition of producer surplus

This is the difference between the price a firm receives and the price it would be willing to sell it
at.

If a firm would sell a good at £4, but the market price is £7, the producer surplus is £3.

Diagram of Consumer Surplus


3
Page

How elasticity of demand affects consumer surplus

If demand is price inelastic, then there is a bigger gap between the price consumers are willing to
pay and the price they actually pay.
The demand curve shows the maximum price that a consumer would have paid. Consumer
surplus is the area between the demand curve and the market price.

If the demand curve is inelastic, consumer surplus is likely to be greater

Monopolies are able to reduce consumer surplus by setting higher prices

Price Discrimination is an attempt to extract consumer surplus by setting.

Consumer surplus and marginal utility theory

The demand curve illustrates the marginal utility a consumer gets from consuming a product. At
quantity 500 litres , the marginal utility is £0.80 – which indicates the marginal utility is 80p.
However, with a price of 50p, the consumer surplus is the difference.

Producer Surplus

This is the difference between the price a firm receives and the price it would be willing to sell it
at. Therefore it is the difference between the supply curve and the market price
4
Page
Answer of 5.

The main features of monopoly market: A monopoly market market is portrayed by the benefit
maximizer, value producer, high obstructions to section, single dealer, and value separation.
Restraining infrastructure attributes incorporate benefit maximizer, value creator, high
boundaries to passage, single dealer, and value segregation.

A monopolist perform wastefully in the market since restraining infrastructure market is


described by the benefit maximizer, value producer, high boundaries to passage, single vender,
and value segregation. Imposing business model qualities incorporate benefit maximizer, value
producer, high obstructions to passage, single vender, and value separation.

Part:B
Answer of 6.1

The concept of perfect competition applies when there are many producers and consumers in the
5

market and no single company can influence the pricing. A perfectly competitive market has the
Page

following characteristics:

a) There are numerous purchasers and merchants on the lookout.

b) Each organization makes a comparative item.

c) Buyers and sellers have access to perfect information about price.

d) There are no transaction costs.


e) There are no barriers to entry into or exit from the market.

Answer of 6.2

All goods in a perfectly competitive market are considered perfect substitutes, and the demand
curve is perfectly elastic for each of the small, individual firms that participate in the market.
These firms are price takers–if one firm tries to raise its price, there would be no demand for that
firm’s product. Consumers would buy from another firm at a lower price instead.

Firm Revenues

A firm in a competitive market wants to maximize profits just like any other firm. The profit is
the difference between a firm’s total revenue and its total cost. For a firm operating in a perfectly
competitive market, the revenue is calculated as follows:

Total Revenue = Price * Quantity

AR (Average Revenue) = Total Revenue / Quantity

MR (Marginal Revenue) = Change in Total Revenue / Change in Quantity

The average revenue (AR) is the amount of revenue a firm receives for each unit of output. The
marginal revenue (MR) is the change in total revenue from an additional unit of output sold. For
all firms in a competitive market, both AR and MR will be equal to the price.

Profit Maximization

In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal
to marginal cost (MR=MC). MR is the slope of the revenue curve, which is also equal to the
demand curve (D) and price (P). In the short-term, it is possible for economic profits to be
positive, zero, or negative. When price is greater than average total cost, the firm is making a
profit. When price is less than average total cost, the firm is making a loss in the market.
6
Page
Perfect Competition in the Short Run: In the short run, it is possible for an individual firm to
make an economic profit. This scenario is shown in this diagram, as the price or average
revenue, denoted by P, is above the average cost denoted by C.

Over the long-run, if firms in a perfectly competitive market are earning positive economic
profits, more firms will enter the market, which will shift the supply curve to the right. As the
supply curve shifts to the right, the equilibrium price will go down. As the price goes down,
economic profits will decrease until they become zero.

When price is less than average total cost, firms are making a loss. Over the long-run, if firms in
a perfectly competitive market are earning negative economic profits, more firms will leave the
market, which will shift the supply curve left. As the supply curve shifts left, the price will go up.
As the price goes up, economic profits will increase until they become zero.

In sum, in the long-run, companies that are engaged in a perfectly competitive market earn zero
economic profits. The long-run equilibrium point for a perfectly competitive market occurs
where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point
of the average cost (AC) curve.
7
Page

Perfect Competition in the Long Run: In the long-run, economic profit cannot be sustained. The
arrival of new firms in the market causes the demand curve of each individual firm to shift
downward, bringing down the price, the average revenue and marginal revenue curve. In the
long-run, the firm will make zero economic profit. Its horizontal demand curve will touch its
average total cost curve at its lowest point.
Answer of 7.1

The main features of oligopoly are elaborated as follows:

a) Few firms

b) Interdependence: Firms under oligopoly are interdependent.

c) Non-Price Competition

d) Barriers to Entry of Firms

e) Role of Selling Costs

f) Group Behaviour

g) Nature of the Product

h) Indeterminate Demand Curve

Answer of 7.2

Characteristics of an Isoquant:

Basic characteristics of an isoquant are same as that of an indifference, hence, they are discussed
briefly with regard to an isoquant below.

Slopes Downwards from Left to the Right:


8
Page
An isoquant slopes downward from left to right or is negatively sloped, as can be seen from
Figure- Such a shape implies that if a firm employs more of labour, it will employ less of capital
or vice versa, in order to maintain the level of output.

Such a shape of isoquant also means that the marginal factor productivities are positive, that is
more of a factor will make a positive contribution in production and less of other factor will
make a negative contribution. To remain on the same isoquant or to maintain the same level of
output, the positive and negative factor contributions should be equal.

When we move from point A to B in Figure, labour contribution increases while that of capital
will fall. Hence —

Only a downward sloping isoquant will satisfy such behaviour since it only shows substitution of
one factor with other. No other shape of an isoquant, whether positively slopped or parallel to X-
axis or parallel to Y-axis, will show such a feature. Thus, an isoquant, in general, should slope
downward from left to right.

Convex to the Point of Origin:

This characteristic of isoquant means that the producer is willing to sacrifice fewer and fewer
units of capital for every additional unit of labour and vice versa. It is depicted in Figure
9
Page
As we move down on the curve from point A to point F his willingness to sacrifice capital for
every additional unit of labour comes down from 5 to 1. As such —

Such behaviour of an isoquant is based on the principle of diminishing MRTS. No other shape of
isoquant, whether concave or a straight line, will show such a feature. In case of a concave
isoquant the MRTS will be increasing while in case of a straight line isoquant, it will be constant.
10
Page

Both of which are logically incorrect because no producer will be willing to sacrifice a larger or
same quantities, respectively, of a factor for successively more of other if the marginal factor
productivities are diminishing. Thus, an isoquant will be, in general, convex to the point of
origin.
A Higher Isoquant Denotes a Higher Level of Output:

Another basic characteristic of an isoquant is that greater its distance from the point of origin,
higher output level it will represent. This is shown in Figure-8.3 where combination B on
isoquant Q2 (OL2 + OK2) shows more of both factors as compared to point A on isoquant Q1
(OL1 + OK1).

Given that marginal factor productivities across the entire length of an isoquant is positive, the
point B should indicate a higher level of output than that of point A. This shows that a higher
isoquant will represent a higher level of output vis-a-vis a lower isoquant.

Two Isoquants Never Intersect Each Other:

Two isoquants representing different levels of output can never intersect. If they do so, it will
produce an absurd result. To show this, we have drawn two isoquants Q1 (= 100 units) and Q2
(= 200 units) intersecting each other at point A in Figure-
11
Page
It means that at the point of intersection the factor combination, OK + OL can produce 100 units
as well as 200 units of output. Such a situation makes no sense as one factor combination can
produce only one level of output.

Even at other points, two intersecting isoquants will produce absurd results which will make it
impossible to decide which one of them represents a higher level of output – a higher isoquant
will show a higher level of output at one point and lower output at other point. Similar will be the
case on a lower isoquant. Hence, it can be concluded that isoquants will never intersect with each
other.
12
Page

You might also like