Question

Question 2

The table below shows the cost and revenue information of a firm.

(a) Complete the table above.

Output (units)	Price (RM)	Total Cost (RM)	Total revenue (RM)	Marginal Cost (RM)	Marginal Revenue (RM)
0	15	0
1	15	10
2	15	22
3	15	37
4	15	55
5	15	79
6	15	111

(b) Determine the price and output at equilibrium.

[6 marks]

(c) Calculate the profit or loss at equilibrium.

[4 marks]

(d) Is this firm in the short-run or long-run? Explain your answer.

[5 marks]

(e) To what type of market structure does this firm belong? Why do you say so?

[6 marks]

Question 3

(a) Explain the marginal cost and average cost. Elaborate on the relationship between the two.

[8 marks]

(b) Elaborate on the main differences between short run and long run.

[4 marks]

(c) Differentiate between economies of scale and economies of scope.

[8 marks]

Question 4

(a) Explain THREE (3) main characteristics of a perfectly competitive firm.

[6 marks]

(b) Using an appropriate diagram, demonstrate how a perfectly competitive firm achieves equilibrium in the short-run.

[7 marks]

(c) Why is the demand curve of a perfectly competitive firm horizontal? Explain your answer.

[7 marks]

Answer 1

b) Price at equilibrium point is 15

Equilibrium Output is 3 units.

Reason is because at 3 units Total Revenue is 45 and Total cost is 37 and both Marginal cost and Marginal Revenue is 15

Under Perfect competition MC=MR=P since under Perfect competition Price(P) is given and any firm has to sell its product at the given price.

Under Perfect competition two conditions should be satisfied.

1 MC=MR=P

2 MC curve should cut MR curve from below and should be rising at the point of equilibrium.

Refer to attached table for Output, Price, Total Cost, Total Revenue, Marginal cost and Marginal RevenueC) While producing 3 units , Total Revenue (TR)= 45, Total Cost(TC)= 37, so equilibrium profit will be as per below given.

Profit(P)= TR-TC

Profit(P)=45-37

Profit(P)=8

d) Firm is in short run and earning super normal profit at equilibrium output of 3 units because here Average Cost= 12.33 is less than its Price=15 and that's why firm is earning super normal profit.

Average Cost(AC)= TC/Number of units of Output

AC= 37/3,

AC= 12.33

Firm cannot be in Long Run because in long run equilibrium firm's Average Cost should be equal to its price because if any firm is earning super normal profit then new firms will enter the industry and this will increase the competition and reduce the price and due to intense competition first cost will get increased and in turn firm will earn only normal profit, whereas if firm are having loss then some firms will leave the industry and this will cause increase in price and will decrease the cost of factors of production due to less competition and as a result firms will earn only normal profit in the long run.

e) This firm belongs to Perfection competition market because here price=15 is given and firm has to sell its product on the given price and under perfect competition firm is price taker and not giver and firm can sell any quantity of it's product on given price.

Q 3

a) Marginal Cost= It is the addition made to the total cost by producing an additional unit of output.

Marginal Revenue- It is the addition made to total revenue by producing and selling an additional unit of output.

Any firm will go on producing till when it's marginal revenue is increasing and marginal cost is not more than its marginal revenue but will go on increasing its production till it's marginal revenue equals it's marginal cost.

So it will be profitable to firm to increase its production till when it's marginal revenue equals it's marginal revenue.

b) Short Run-time Short run is the period when it is not possible for any new firm to enter the market and any old firm to leave the market and also it is not possible to increase any factor of production, e.g. Labour, Capital Equipment, Machinery, etc.

Long Run-time it is the period when any new firm can enter the market and old ones can leave the market and all factors of production can be increased or decreased, e.g. Labour, Capital equipment, Machinery, Land, etc.

d) Economies of scale- When any firm reduces it's average cost(cost per unit) of production by producing more units of any single product.

Economics of scope- When any firm reduces it's average cost by producing more number of different products.

Q 4

a )Thre characteristics of Perfect competitive firm.

1 It is producing homogeneous product.

2 Firm has perfect knowledge about the prevailing market price.

3 Firm is free to exit and enter the market any time.

C) Demand curve of perfectly competitive firm is horizontal because price is given for the perfectly competitive firm and it has to accept the given price, it cannot Influence the given price and that's why it's demand curve is horizontal.