Question

QUESTION 3
3.1 In the market for cars, the trade union has successfully negotiated a 20% increase in wages for workers in this sector. With the aid of a well labelled diagram, explain the effect of the wage increase (ceteris paribus) on the supply of cars.
3.2 In 3.1 above, with the aid of a well labelled diagram describe the effect an improvement in worker productivity (ceteris paribus) will have on the supply of cars.
3.3 Briefly explain ANY FOUR (4) determinants of supply for the car market in your country.
QUESTION 4
4.1 Differentiate with examples, total cost (TC), total fixed cost (TFC) and total variable cost (TVC).
4.2 Explain with examples, the following;
4.2.1 Constant returns to scale.
4.2.2 Increasing returns to scale.
4.2.3 Decreasing returns to scale.
4.3 Distinguish between explicit costs and implicit costs.
QUESTION 5
5.1 Explain the difference between normal profit and economic profit.
5.2 Explain ANY FOUR (4) factors of production .
5.3 Explain with the aid of a properly labelled diagram, the marginal revenue curve facing a perfectly competitive firm.

QUESTION 6
6.1 The goal of any firm is to maximise profit, discuss the two (2) rules of profit maximisation for a firm.
6.2 Discuss ANY FIVE (5) features of a firm under oligopoly.

Answer 1

Ans (3) The increase in wage rate have directly effect on supply curve it will shift the supply curve to left ward. The reason is that with the increase in wage rate the price of cars will also increase because the cost has been increased as a result the demand of cars will decrease.

As shown in the figure the price will increase in the market as there is one to one relation of the price and wage rate. The quantity demanded will decrease by the amount of increase in price of the market.

Ans(3.2) The supply of car has shifted downward because of increase in price or cost incurred in production of cars as described in above part. But the efficiency of workers has increased now they can do work more efficiently as there wages has increased the supply of labour will increase but the demand of labour will decrease because of decrease in quantity demanded of cars. Now the same amount of cars can be produced by the less workers as the efficiency of labour has increased by the increase in wages. For adding more to there income workers will produce more output with more efficiency.

Ans(3.3) The factors affecting supply curve or the determinant of supply curve:

(1) Relative goods: These are the goods which are effected by demand of other goods. These are of two types substitute goods and complementary goods. Substitute goods are those goods which can be substitute in place of other goods. For eg : the increase in price of coffee can increase the supply of tea. As coffee and tea are substitute of each other.

While complementary goods are those goods which are used together to fulfill the demand. For eg: car and petrol increase in price of petrol can reduce the supply of cars also.

(2) Income of consumer: If the income of consumer is increased the quantity of supply will shift rightward as the demand of quantity has been increased because of increase in income.

(3) Price of goods: There is one to one relation between price and quantity produced. The increase in price will directly effect the supply of product as this will motivate the producer to increase the supply of product as a result the supply curve will shift to rightward. The more is produced when there is increase in price.

(4) Taste and preference: As the taste and preference can be changed from time to time or this is different from person to person. The more preferred the good is more will be produced by supplier and vice versa.

Ans (4) Total cost: It is cost of input which is incurred in production of any good by the producer in the market. It is first increased with the output after some point it will decrease because with the increase in production of goods the cost will decrease it is of inverted U shaped curve. For eg: the wages paid to workers, raw material electricity bill interest rate etc are examples of the cost.

Total variable cost: It is cost which is incurred by producer in the variable inputs ( the goods which can be changed in short run) the more variable factor are used more will be the cost. This is also inverted U shape curve the production of more output will decrease the input cost. First it will rise with the production of goods then it will decrease.

Total fixed cost: it is fixed cost which the firm have to bear no matter the firm produce more or less of the product. It is unit elastic or its shape is rectangular hyperbola. For eg : cost of machines, etc.

4.2.1 constant return to scale: The increase in input will result in same increase in output. There homogeneity is 1 . for eg : The increase in 2 worker the output is also increased by 2 amount.

Increasing return to scale: The increase in input will result in more output then increase in input. There homogeneity is greater then 1. For eg: increase in 2 labour will increase the output more then 2 amount.

Decreasing return to scale: The increase in input will produce less output then before. There homogeneity is less then one. For eg : the increase in 2 labour will decrease in output or not able to increase the output by 2 amount.

4.3 Explicit cost: these are the cost which are not paid by the producer or kept by the producer for future output in the firm only. For eg : the wages not paid to the owner of the firm as the owner will keep profit in the end if it occurred or bear the loss but will keep the salary for himself.

Implicit cost: these are cost which are paid outside the firm. For eg: the wages paid to worker, the interest paid to lenders, the dividend paid to shareholders etc.

Ans (5) Normal profit is the profit which include all the cost which is paid to the different factors which are engaged in the production. For eg : management cost, dividend etc

While economic profit is the profit which first diduct the amount of all cost. After deduction of all the cost whatever the amount is left is the economic profit.

5.2) factors of production:

1) Economy season: If there is depression in the economy the demand of the product is less as a result the less will be produced or vice-versa.

2) Interest rate: If the interest rate is less in the market the investment will be higher in firm as the cost will decrease because of interest rate is decreased so more will be produced at cheaper rate the opposite will be occurred if the interest rate is higher.

3) Income: if the income of consumer is increased then demand will also increase in the market this will shift the supply curve to rightward more will be produced.

4) Innovation: If new technology is invented by which the cost of firm is decreased then the firm will produce same amount of product with more efficiently or more will be produced by the firm.

5.3) In perfect competition market MR( Marginal revenue) is equal to the price as the firm is price taker. It will produce output at given price in the market according to their cost efficiency. The MR is horizontal to the X- axis.

Price will be determined in the market by the demand and supply in the market. As the firm is price taker not price maker. Marginal revenue is the revenue which is earned by firm by selling one more unit in the market. It will be equal to the price in the perfect competition market.

Ans(6) The goal of any firm is to maximize the profit. There is competition among the sellers to earn more for the investment in the firm. There are various rules in the market by which producer earn more profit. But here 2 are described:

1) total cost: the firm will produce at the place the difference between total cost and total revenue is maximum. As more output is produced the revenue will be greater but the cost is decreased as more unit of goods are produced by same input. The point will come where the difference between both will be maximum and the firm will produce here only. As after some point the revenue is decreased because of diminishing marginal revenue tendency and the cost will start will start decreasing.

(2) The second method is the firm will produce where there marginal cost curve the marginal revenue curve from below and at this point marginal revenue is equal to marginal cost. After this point marginal revenue will decrease and marginal cost will increase.

6.2) Features of oligopoly marker:

There is few sellers in the market among many buyers.

They are price setters not the price taker. They set price according to their demand and profit in the market.

The demand curve or marginal revenue curve is kinked shaped.

The main feature is of price catering in the market. They compete with the sellers to increase there market share in the market.

There product is differentiated goods but slightly substitute.