Microeconomics Questions and Answers 2022

Running head: Microeconomics
Microeconomics
Name of the Student
Name of the University
Student ID

1Microeconomics
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 6..........................................................................................................................................5
Answer 7..........................................................................................................................................7
Answer 8..........................................................................................................................................8
References......................................................................................................................................10

2Microeconomics
Answer 1
(a)
Figure 1: Single Seller Firm
Source: (Created by the Author)
In a market when there is only a single seller, it means the market is in monopoly market
structure. In monopoly market structure seller has the complete control over the market and can
charge any price it wants to as the buyers have do not have any other option or seller to buy from
(Dang, 2016). Thus, taking this advantage the seller charges price above free market price Pc and
also supplies less than free market quantity that is Qc. The price and quantity that single seller
offers is shown in the diagram above as P* and Q* respectively. Thus, consumer receives less
quantity at more price and hence there is loss of consumer surplus. Thus, the allocation made by
a single firm is an inefficient one.
(b)
The single market seller has advantages and disadvantages both. Mostly in case of this
market discussions are made on disadvantages such as consumer surplus loss, less productive,

3Microeconomics
higher price, les innovation, negligible incentive for cutting cost and inefficient allocation
(Gordon, 2018). On the other hand, the advantages the market has are economies of scale, high
profit that can be invested for research and development, incentive of getting patent right and if
government regulates then fair price and more efficiency can be achieved since the single sellers
are highly efficient in what they produce. Thus, there are many advantages of the single market
seller but most are relative and regulation oriented but disadvantages are general and regular and
hence disadvantages over trumps the advantages.
Answer 2
Perfectly competitive market structure is the benchmark for efficient allocation because
in this market structure there are unlimited buyers and sellers and thus no one has market power
and thus price, demand and supply are determined by the free market forces (Wang & Lu, 2016).
Thus, there is no loss in surplus of the consumer or the producer and also there is no loss in
social welfare in the form of dead weight loss (Liu, 2015). In figure 2, it can be seen that the
price and quantity are determined by the demand and supply equilibrium and are given as P* and
Q* respectively.
Figure 2: Efficient allocation

4Microeconomics
Source: (Created by the Author)
(b)
In case of monopolistically competitive markets structure there are few number of firms
that produces closely identical goods and have low market power and thus can slightly influence
the price of the market and the marginal revenue is not equal to average revenue curve or
demand curve like perfectly competitive market (Nikaido, 2015). Apart from that, under this
market structure the MR and AR curve both are downward sloping unlike perfect competition.
The firms in this market structure operates like the monopoly firms, but the demand curve is
slightly flatter. The diagram below shows the equilibrium price and quantity of the market
structure.
Figure 3: Monopolistically competitive market
Source: (Created by the Author)

5Microeconomics
The price and quantity in monopolistically competitive firm are given as P* and Q*
respectively and price is higher and quantity is lower than perfectly competitive market.
Answer 6
The government control pollution that is also a negative externality by using the two
measures, one is by imposing tax on the products, consumption of which creates pollution and
limiting the production of the goods, production process of which produces pollution (Bertarelli
& Lodi, 2019). Thus, effect of imposition of tax can be seen in figure 4, where taxing the product
increases its price and thereby the consumers decreases consumption and quantity sold in the
market decreases and thus pollution generated before the imposition of tax has reduced and the
tax collected from the consumption of the product can further be utilized to compensate the
pollution occurred from the consumption. On the other hand, the production process of a product
that generates pollution at source can be restricted by introducing licensing policy to limit the
number of firms in the industry or by directly limiting the amount of the produce. Under
licensing policy the firms has to take the license of producing a certain product by paying license
fees to the government and thus the price of license restrict many firms from entering the
industry. Moreover, if the government put a ceiling of production the also the firms cannot
produce beyond that fixed point and thus production is restricted. The graphical representation of
this measure is given in figure 5.

6Microeconomics
Figure 4: Tax on
goods
Source: (Created by the Author)
Figure 5: Production license and
ceiling on production
Source: (Crated by the Author)

7Microeconomics
Answer 7
(a)
Irrespective of short run or long run a firm would continue to operate if it price is above
average variable cost because fixed or sunk cost of a firm that it invested during establishment
cannot be recovered if it stops production (Matsumoto, 2018). The only cost that is recoverable
is variable cost, thus if has price which is over average variable cost indicates that by operating
the firm able to recover it variable cost and some of its fixed or sunk cost (Shepherd, 2016).
However, if the price fall below average variable cost the by operating the firm is not even
capable of recovering the variable cost and thus it is better for the firm to stop production. Thus,
price above average variable cost allows a firm to continue its operation.
(b)
The statement in the question is not true as the statement states that a firm makes zero
economic profit when its marginal cost equals marginal revenue and total cost equals total
revenue because ma firm makes zero economic profit when all the four parameters are equal to
each other and that occurs in perfect competition where firms earn zero economic profit
(Kaufman, 2015). It is evident from the diagram given below that a firm which is making zero
economic profit has its all the above four parameters equal. In the diagram total revenue and total
cost is given for per unit of product and thus average cost and average revenue is given.

8Microeconomics
Figure 6: Zero economic profit
condition
Source: (Created by the Author)
Answer 8
(a) At price $8 the firm will produce 70 units of the product in order to maximize profit.
(b) At this output the average cost of production will be $6.
(c) The price is $8 per unit and average cost is $6. Number of units produced is 70. Therefore,
for 70 units cost will be $(6x70) or $420 and revenue earned from selling same amount of units
is $(8x70) or $560. Therefore, super normal profit earned by the firm is $140.
(d) At price $5 the firm will produce 50 units of the product in order to maximize profit.
(e) At this price $5 the firm will make no supernormal profit as the price equals the marginal cost
and average cost at the point where marginal cost and average cost equals to each other resulting
in perfectly competitive market equilibrium where a firm does not earn supernormal profit (Hall,
2018).

9Microeconomics
(f) At price $4 the firm cannot maximize profit as the price is lower than average cost. However,
the firm minimizes loss by producing 40 units.
(g) At this price the firm has no profit as the price is lower than average cost and thus the firm
making loss at this price.
(h) In the short run the firm would shutdown if the price of products is below average variable
cost.
(i) In the long run the firm would shutdown if the price is below average cost.

10Microeconomics
References
Bertarelli, S., & Lodi, C. (2019). Heterogeneous firms, exports and pigouvian pollution tax: Does
the abatement technology matter?. Journal of Cleaner Production, 228, 1099-1110.
Dang, C. H. E. N. (2016). Monopoly or competition: Market concentration of China's online
games and policies. International Journal of Simulation--Systems, Science
&Technology, 17(45), 1-4.
Gordon, A. P. L. (2018). The Problem of Trust and Monopoly Control. Routledge.
Hall, R. E. (2018). Using empirical marginal cost to measure market power in the us
economy (No. w25251). National Bureau of Economic Research.
Kaufman, B. E. (2015). The RBV theory foundation of strategic HRM: critical flaws, problems
for research and practice, and an alternative economics paradigm. Human Resource
Management Journal, 25(4), 516-540.
Liu, J. (2015). Copyright Complements and Piracy-Induced Deadweight Loss. Ind. LJ, 90, 1011.
Matsumoto, Y. (2018). Endogenous Sunk Cost, Scale Economies, and Market
Concentration. Graduate School of Economics and Osaka School of International Public
Policy (OSIPP) Osaka University Discussion Papers In Economics And Business, 18, 1-
22
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Shepherd, R. W. (2016). Theory of cost and production functions (Vol. 2951). Princeton
University Press.

11Microeconomics
Wang, Y. B., & Lu, J. R. (2016). A supply-lock competitive market for investable
products. Asian Development Policy Review, 4(4), 127-133.