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Is it a valid criticism of perfect competition to argue that it is incompatible with economies of scale?
If supernormal profits are competed away under perfect competition, why will firms have an incentive to become more efficient?
If the industry under perfect competition faces a downward-sloping demand curve, why does an individual firm face a horizontal demand curve?
A perfectly competitive firm faces a price of £14 per unit. It has the following short-run cost schedule:
\r\n| \r\n Output \r\n | \r\n\r\n 0 \r\n | \r\n\r\n 1 \r\n | \r\n\r\n 2 \r\n | \r\n\r\n 3 \r\n | \r\n\r\n 4 \r\n | \r\n\r\n 5 \r\n | \r\n\r\n 6 \r\n | \r\n\r\n 7 \r\n | \r\n\r\n 8 \r\n | \r\n
| \r\n TC (£) \r\n | \r\n\r\n 10 \r\n | \r\n\r\n 18 \r\n | \r\n\r\n 24 \r\n | \r\n\r\n 30 \r\n | \r\n\r\n 38 \r\n | \r\n\r\n 50 \r\n | \r\n\r\n 66 \r\n | \r\n\r\n 91 \r\n | \r\n\r\n 120 \r\n | \r\n
(a) Copy the table and put in additional rows for average cost and marginal cost at each level of output. (Enter the figures for marginal cost in the space between each column.)
\r\n(b) Plot AC, MC and MR on a diagram.
\r\n(c) Mark the profit-maximising output.
\r\n(d) How much (supernormal) profit is made at this output?
\r\n(e) What would happen to the price in the long run if this firm were typical of others in the industry? Why would we need to know information about long-run average cost in order to give a precise answer to this question?
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Why might it make sense for a firm which cannot sell its output at a profit to continue in production for the time being? For how long should the firm continue to produce at a loss?
Draw a diagram like that in Figure 6.21. Now illustrate the effect of a rise in demand for the product. Mark the new profit-maximising price and output. Will the profit-maximising output, price, average cost and profit necessarily be higher than before?
Why do marginal cost curves intersect both the average variable cost curve and the average cost curve at their lowest point?
‘Both short-run and long-run average cost curves may be shaped, but the explanations for their respective shapes are quite different.’ Explain this statement
Taking the same industries, identify as many economies of scale as you can.
Choose two industries that you believe are very different. Identify factors used in those industries that in the short run are (i) fixed; (ii) variable.
Draw the isoquant corresponding to the following table, which shows the alternative combinations of labour and capital required to produce 100 units of output per day of good X.
\r\n| \r\n K \r\n | \r\n\r\n 16 \r\n | \r\n\r\n 20 \r\n | \r\n\r\n 262/3 \r\n | \r\n\r\n 40 \r\n | \r\n\r\n 60 \r\n | \r\n\r\n 80 \r\n | \r\n\r\n 100 \r\n | \r\n
| \r\n L \r\n | \r\n\r\n 200 \r\n | \r\n\r\n 160 \r\n | \r\n\r\n 120 \r\n | \r\n\r\n 80 \r\n | \r\n\r\n 531/3 \r\n | \r\n\r\n 40 \r\n | \r\n\r\n 32 \r\n | \r\n
(a) Assuming that capital costs are £20 per day and the wage rate is £10 per day, what is the least-cost method of producing 100 units? What will the daily total cost be? (Draw in a series of isocosts.)
\r\n(b) Now assume that the wage rate rises to £20 per day. Draw a new set of isocosts. What will be the least-cost method of producing 100 units now? How much labour and capital will be used?
\r\n
The following table shows the average cost and average revenue (price) for a firm at each level of output.
\r\n\r\n
\r\nOutput\r\n | \r\n\r\n 1 \r\n | \r\n\r\n 2 \r\n | \r\n\r\n 3 \r\n | \r\n\r\n 4 \r\n | \r\n\r\n 5 \r\n | \r\n\r\n 6 \r\n | \r\n\r\n 7 \r\n | \r\n\r\n 8 \r\n | \r\n\r\n 9 \r\n | \r\n\r\n 10 \r\n | \r\n
| \r\n AC (£) \r\n | \r\n\r\n 7.00 \r\n | \r\n\r\n 5.00 \r\n | \r\n\r\n 4.00 \r\n | \r\n\r\n 3.30 \r\n | \r\n\r\n 3.00 \r\n | \r\n\r\n 3.10 \r\n | \r\n\r\n 3.50 \r\n | \r\n\r\n 4.20 \r\n | \r\n\r\n 5.00 \r\n | \r\n\r\n 6.00 \r\n | \r\n
| \r\n AR (£) \r\n | \r\n\r\n 10.00 \r\n | \r\n\r\n 9.50 \r\n | \r\n\r\n 9.00 \r\n | \r\n\r\n 8.50 \r\n | \r\n\r\n 8.00 \r\n | \r\n\r\n 7.50 \r\n | \r\n\r\n 7.00 \r\n | \r\n\r\n 6.50 \r\n | \r\n\r\n 6.00 \r\n | \r\n\r\n 5.50 \r\n | \r\n
\r\n
(a) Construct a table to show TC, MC, TR and MR at each level of output (put the figures for MC and MR mid-way between the output figures).
\r\n(b) Using MC and MR figures, find the profit-maximising output.
\r\n(c) Using TC and TR figures, check your answer to (b).
\r\n(d) Plot the AC, MC, AR and MR figures on a graph.
\r\n(e) Mark the profit-maximising output and the AR and AC at this output.
\r\n(f) Shade in an area to represent the level of profits at this output.
\r\n
Give some examples of how governments try to nudge people to help them make better decisions.
Using the theory of present bias, provide an economic rationale for government regulation of the payday loan market.
Draw a utility/value function that illustrates the concepts of reference dependent preferences, loss aversion and diminishing marginal sensitivity to gains/losses.
Dean supports Leicester City football club and has paid £80 for a ticket to watch them play in a cup final. The maximum amount he is willing to pay for the ticket is £200. Another Leicester City supporter offers him £400 for the ticket. Even though there are no restrictions on the resale of the tickets, Dean decides not to sell. Is his decision consistent with the predictions of rational decision making in standard economic theory? Explain your answer.
Outline the so-called ‘disposition effect’. Provide an explanation of why it might occur.
Using the availability heuristic, explain hindsight bias.
What is the representativeness heuristic? Explain how the gamblers and hot-hand fallacies are examples of the representativeness heuristic.
Give some examples of mental short-cuts/heuristics that you use. Why do you use them?
How does behavioural economics differ from standard economics?
How does economics predict rational consumers will treat spending on credit cards compared with spending cash? Do you think there are likely to be differences in the way people spend by each? If so, can you explain why?
Euro NCAP carries out crash tests on new cars in order to assess the extent to which they are safer than the minimum required. The cars are given a percentage score in four different categories, including adult occupant protection and child occupant protection. An overall safety rating is then awarded. Based on the test results in 2020, the Volkswagen ID. 3 was judged to be the safest car on the market. If you observed that these cars were more likely to be involved in traffic accidents, could this be an example of adverse selection or moral hazard? Explain.
Discuss the EU ruling that gender may not be used to differentiate insurance premiums. Which insurance markets would be affected by outlawing age ‘discrimination’ in a similar manner? What would be the impact?
A country’s central bank (e.g. the Bank of England or the US Federal Reserve) has a key role in ensuring the stability of the banking system. In many countries the central bank is prepared to bail banks out which find themselves in financial difficulties. Although this has the benefit of reducing the chance of banks going bankrupt and depositors losing their money, it can create a moral hazard. Explain why.
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