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

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)