Question 1 a. With the aid of a diagram explain how a monopolist determines how much output to produce and what price to charge. b. Explain how the perfectly competitive firm decides whether to operate or shut down in the short run. c. Explain why firms operating in monopolistically competitive markets probably will not earn an economic profit in the long run. d. Why does interdependence of firms play a major role in oligopoly but not in perfect competition or monopolistic competition?
Question 1
a. With the aid of a diagram explain how a monopolist determines how much
output to produce and what
b. Explain how the
down in the short run.
c. Explain why firms operating in monopolistically competitive markets probably
will not earn an economic profit in the long run.
d. Why does interdependence of firms play a major role in oligopoly but not in
perfect competition or
Question 2
a. A producer borrows money and starts a business. He himself looks after the
business. Identify implicit and explicit costs from this information. Explain.
b. List and explain which of the following is a fixed cost or a variable cost for
Caribbean Airlines.
i. The cost of fuel used in its planes.
ii. The rent on its Piarco headquarters.
iii. The lease payments on its current inventory of jets.
iv. The cost of peanuts it serves to passengers.
v. The salary paid to the Chief Executive Officer.
c. How is the difference between average total cost and
impacted by an increase in output?
Question 3
a. Andre has a salary of $1000. He spends his entire budget on shoes and beers.
The cost for a pair of shoes is $15 and the cost for can of beer is $25.
i. Construct Andre’s budget constraint (place) beers on the y-axis.
ii. Suppose Andre’s salary rises by 25%. Also suppose that the price of
shoes and beers each rise by 40%. Construct Andre’s new budget
constraint. What is the difference between the new and old budget
constraints?
iii. Suppose that the price of beers fell from $25 per beer to $15. Construct
Andre’s new budget constraint. What is the difference between the new
and old budget constraints.
b. Explain the relationship between the budget constraint and indifference curve
at consumer optimum.
Question 4
a. The following presents the costs and revenues for a firm.
Quantity Total Cost Marginal
Cost
Total
Revenue
Marginal
Revenue
Profit
0 15 0
1 30 100
2 48 190
3 59 300
4 68 450
5 74 500
6 79 505
7 81 308
i. Calculate the marginal cost, marginal revenue and profit for each unit
of production.
ii. How many units should the firm produce to maximise profit?
b. Describe the relationship between the marginal product and the total product
of a firm
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