Economics Exam: Perfect Competition, Elasticity of Demand, Implicit Cost, Exchange Rate

This exam covers topics such as perfect competition, elasticity of demand, implicit cost, and exchange rate. It includes questions and answers with calculations and explanations.

ECONOMICS EXAM

Table of Contents
Question: 1.......................................................................................................................................3
Question: 2.......................................................................................................................................3
QUESTION 3..................................................................................................................................4
(a).................................................................................................................................................4
(b).................................................................................................................................................4
(c).................................................................................................................................................5
QUESTION 5..................................................................................................................................5
(a).................................................................................................................................................5
REFERENCES................................................................................................................................1

Question: 1
A)
The reason behind equality between price and marginal revenue in perfectly competitive market,
the firms are the price taker and the industry hold the power of determining the price of the
products and services. The alternative market scenario, where monopoly exists, in that case the
monopolist has the power to determine the price of the product and thus determined it above the
marginal revenue to earn higher profits by producing lower quantity of goods. However,
perfectly competitive firm seeks to produce at an economic level of price and quantity to remain
competitive in the market. Also, the reason behind such equality in perfectly competitive firm is
that the firm do not change the price at any level of output. Alternatively, in case of monopolist,
in an attempt to sell additional units, he must undertake to lower their prices.
B)
By looking at the table given, it has been concluded that the firm given here is operating in
monopolistic market where by reducing the price of a product, monopolist is increasing his total
revenue and quantity sold. Accordingly, price is above marginal revenue, but both are decreasing
with the sale of additional unit.
c)
From the table given, the profit maximising price would be 63 at which 4 units could be sold.
This is because, to this point total revenue is increasing along with marginal revenue being
greater than marginal cost. After this level, marginal cost is increasing and is above marginal
revenue indicating lower profitability or loss conditions for the monopolist.
Question: 2
A)
When the demand for the product or service is perfectly inelastic and the supply is perfectly
elastic, then this is the circumstance where the whole tax can be levied on to consumers. For
example, capital market in small countries or businesses. This leads to passing off tax burden to
consumers by charging higher prices without experiencing any major decline in the equilibrium
quantity supplied or sold. Here, the circumstance is such where consumers are having less
options or choices to choose from and are bound to accept whatever is available at a given price.
B)

Elasticity of demand through midpoint formula = Percentage change in quantity / percentage
change in price
Percentage change in quantity = Q2 – Q1 / (Q2 + Q1) / 2 * 100
Q1 = 200
Q2 = 120
Percentage change in quantity = 120 – 200 / (120 + 200) / 2 * 100 = -80 / 160 * 100 = -50
Percentage change in price = P2 – P1 / (P2 + P1) / 2 * 100
P1 = 5
P2 = 7
Percentage change in price = 7 – 5 / (7 + 5) / 2 * 100 = 2 / 6 * 100 = 33.33
Price elasticity of demand = -50 / 33.33 = -1.50
Hence, elasticity of demand between these two points of price and quantity is 1.5, which
indicates that the demand is elastic. This is because the elasticity of demand is greater than one.
C)
Short run price elasticity of demand = 0.2
Percentage change in price of petrol = 28%
Effect on quantity demand in the short run = elasticity of demand * percentage change in price of
petrol = 0.2 * 28% = 5.6% change in quantity demanded will be there in short run.
Long run price elasticity of demand = 0.7
Percentage change in price of petrol = 28%
Effect on quantity demand in the long run = elasticity of demand * percentage change in price of
petrol = 0.7 * 28% = 19.6% change in quantity demanded will be there in the long run.
QUESTION 3
(a)
The total cost of production at 200 units = $4000
The total cost of production at 220 units = $4200
So, the variable cost are $3200 at the output 200 units and variable cost per unit = 16.
Thus, the variable cost per unit for producing the 200 units is $16 per unit.

(b)
Calculation of Implicit cost
The annual implicit cost of the Geraldine is = risk bearing cost + sacrificed rental income +
interest income on borrowed money
= $8000 + $4000 + $1000* 10%
= $8000 + $4000 + $100 = $12100
Calculation of Economic profit
= Revenue - Total cost (Explicit + Implicit cost)
= 18000 - (4000 + 12100)
= 18000 - 16100 = $1900
(c)
If the commercial Vineyard uses the pesticides in the production of grapes then it is a
case of market overproduction. It is because the vineyards are using the pesticides to keep their
grapes produce easily and quickly along with keep them fresh. This is a situation of
overproduction market because in economics overproduction means excess of supply over the
demand of the goods and services in the market using the both legal as well as illegal way.
To internalise this externality, the government need to tax the vineyard on using the
pesticides to overproduce the grapes. It is because this pesticides is harmful for the consumers
and also illegal which can cause serious health issue to the consumers. Thus, if the government
will imposed tax on the vineyard if they will found pesticide in more than 38 grapes out of the
124 grapes sample. This is only the way to internalise this illegal way to overproduce the grapes.
QUESTION 5
(a)
The exchange rate of 1.5 euro per dollar means
So, the $10000 is equal to = $10000* 1.5 = 15000 euro
The interest income of the investors from the euro investment in first year = 15000* 10% = 1500
euro that is 1500/1.5 = 1000 dollar.

So, the total money received by the investors at the end of first year = Principal amount + interest
amount
= 15000 + 1500 = 16500 euro
Now, at the end of the year the investors has switched its investment to Australian investment
where the exchange rate was 2 euro per Australian dollar
The the investor need to receive 16500 euro for Australian investment which is equal to 16500/ 2
= 8250 dollar.
So, on the basis of above calculation, it is interpreted that investors has earn the less money by
10000 - 8250 = 1750. It is because the investors invest $10000 dollar in euro investment but at
the time of switching to Australian investment the investors receives only 8250 dollar from the
euro investment.
If the exchange rate became 1 euro per Australian dollar that the investors will receive 16500/1
= 16500 dollar. Then, in this case the investor will earn more money because of the switching to
Australian investment. It is because the exchange rate of euro to Australian dollar has decreased
at the end of the year. They have earn more money by $16500 - $10000 = $6500.
b
A.
The higher interest rate of the Japan means that the investment assets of the Japan will give high
interest rates to its investors. So, the Australia investors will prefer more investment in Japan yen
investment assets in order to earn more income and profit from the investment. This means that
the demand of the Australian dollars decreases and on the same side the supply of the Japanese
yen increases. This means that the increase in the interest rate of the Japan has would tend to
depreciate Australian dollar against the Japanese Yen.
B.
A tight Australian monetary policy means the higher interest rates on loans and less on deposits
which leads to lower aggregate demand and less savings and investment. With this, the money
supply within the economy gets reduced and accordingly, there would be lesser demand for
Australian dollar which leads to depreciation of Australian dollar exchange rate against other
currencies where there exists lenient monetary policies.

C.
The expansionary Australian fiscal policy means increase in the government spending or
decrease in the taxes in order to drive the aggregate demand and stable the economy of Australia.
This policy will increase the demand of the Australian dollar because the people will start
operating their business in Australia where they need to pay low tax. This means that such
change in Australia would tend to appreciate the Australian dollar.

REFERENCES
Books and journals
Online
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