Economics for Decision Making: Assignment

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ECONOMICS FOR DECISION MAKERS

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Table of contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................4
Question 4..................................................................................................................................5
Question 5..................................................................................................................................8
Question 6..................................................................................................................................8
Reference..................................................................................................................................10

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Question 1
The shareholders of BP also represent a structure which is same as that of perfect
competition. This is due to the fact that, the share market has a structure similar to that of a
market structure of perfect competition. One of the main assumptions of the perfect
competition is that there are a huge number of buyers and sellers in the market. Likewise, the
number of potential shareholders and the companies which are selling the share is also very
huge. McKenzie and Lee (2016) stated that one of the unique features of perfect competition,
that is absent from the other market structure is the lack of power to the buyers and the sellers
to control the price. The shareholders and the company management of BP both do not have
any control over the prices of the share. The share prices of BP depend on the interaction of
the shared demand and the share supply in the market just like the case of perfect
competition. Another similarity that exists in the share market is the free entry exits which
allow any of the company to offer their company to stake to the potential shareholders who
can choose to sell and exit the market anytime they wish.
Question 2
a) The demand is P= 1000-2Q and the supply of the market is P=100+Q
Now the market is in equilibrium when the supply is equal to the demand
1000-2Q= 100+Q
=>3Q= 900 => Q=300
Now put the value of Q in the demand equation,
P=1000-2*(300) = 400
Therefore the equilibrium quantity is 300 egg cartons and the price is 400 units.
b) The profit maximisation condition for the perfect competition is
P=MC
Answer from the part (a) is that P= 400
=> 400= 2q+1

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=> q= 199.5
Total revenue = (400*199.5) = 79800
Total cost= 100+(199.5)^2+199.5= 40099.75
The total profit = TR- TC= (79800-40099.75) = 39700.25
c) The above profit maximisation of the seller is in the short run where it is able to earn a
supernormal profit. However, in the long run, the number of a seller in the market would rise
leading to an increase in the supply. These would reduce the gap between the total revenue
and the total cost of the firm and hence it would not earn a supernormal profit in the long run.
d) The long-run profit maximisation is where the,
MR=MC= ATC
=> 2q+1= (100+q^2+q)/q
=> 2q^2+q= 100+q^2+q
=> q^2=100 => q= 10
Putting the value on the demand equation P= 100+10= 110
e) Given the prices calculated in the part d) the number egg boxes produced in the market
would be q= 10.
Question 3
a) One of the major factors that drive the profit in the perfectly competitive market, in the
long run, is the free entry and exit. The short run supernormal profit attracts new sellers in the
market increasing the supply. Apart from that, the diseconomies of scale also do not bring
down the cost of operation leading to a situation where the profit, in the long run, is zero.
b) i) This situation is a situation where the price is less than the average total cost but more
than the average variable cost so that the firm can continue operating in the short run.

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Figure 1: The perfect competition
(Source: McKenzie and Lee, 2016)
ii) This situation is where the price is below the average variable cost of the firm and firm
cannot continue the production.
c) The short-run supply curve is the marginal cost curve of the seller. The point from where
the firm can continue operating is after the intersection of MC and AVC. In the situation (ii),
the equilibrium (P=MC) is left of the intersection and hence the production stops. On the
other hand, the scenario (i) the equilibrium lies to the left of the intersection and hence firm
continue to operate even after incurring a loss.
Question 4
a)
i)
from the information,
P=1000-2Q
Total revenue is P*Q

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=> 1000Q-2Q^2
Marginal revenue= 1000-4Q
That means marginal revenue curve has a higher slope than the demand
Figure 2: the marginal revenue of the company
(Source: Developed by the learner)
ii) For the monopoly, the profit maximisation is where MR=MC
=> 1000-4Q= 2Q+1
=> Q= 999/6 =166.5

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Figure 3: the short run profit maximisation of a monopolist
(Source: Baumol and Blinder, 2015)
Putting the value on the demand curve,
P= 1000-2(166.5)= 667
Thus equilibrium price is 667 and quantity is 166.5
b) P= 667 and Q= 166.5
Now the total revenue= (667*166.5)= 111055.5
Total cost = 100+ (166.5)^2+166.5= 27988.75
Profit= (111055.5-27988.75) = 83066.75
This is the short-run equilibrium of the market where the monopoly where the average cost
curve is more u shaped.
c) The long run and the short run of the monopoly is somewhat same to each other, however,
in the long run, the monopolist enjoys a reduced average cost of the production due to the
economies of scale and hence supernormal profit increases in the long run for the monopolist.

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Question 5
a) One of the main differences between the two market structures is that product in perfect
competition is homogenous whereas, the products of the monopolistic competition have their
own uniqueness. Nevertheless, the number of sellers and buyers in both markets is very high.
Friedman (2017) commented that due to the differentiated product the degree of power over
the price for the monopolistically competitive firm is more than that of the perfectly
competitive firm.
b) If a firm introduces the new improved product in the market, overall demand and the price
increases slightly due to the fact that, the sellers of the market are price takers.
c) Although the products of the monopolistically competitive market are differentiated, the
other products are a close substitute. Therefore the demand for the product for each of the
firm is relatively elastic. When considered all the products of the market, they are inelastic in
demand and hence total market demand curve is steeper and the individual demand curve is
flatter.
d) The statement is not valid due to the fact an increased number of sellers increases the
competition in the market. Therefore, supernormal profit enjoyed by these firms reduces with
the increase in the number of firms and hence the cost of operation reduces. This also leads to
higher welfare and hence results in efficiency.
Question 6
a) One of the major features of the oligopolistic market is the interdependence of the firms in
the market where the decision of one firm influences the operation of the other firm. In the
oligopolistic setting, the sellers of the market can sell differentiated products which can be
substituted by the consumers of the market. The kinked demand curve of the market shows
the stability of the price of the oligopolistic market.
b) The cartel is a situation where the oligopolistic players of the market collaborate with each
other in order to keep the price of the market same. This cartel paves the way for the nonprice
war among the sellers in form of competition in the market. However, if any of the sellers in
the cartel breaches, the price may reduce increasing the market share for that player. In the
case of OPEC, the strong legal contract between the members did not allow them to reduce
the price in return of market share (Bauer, 2018). Each of the players shared the overall
market share. However, in the case of CIPEC, members reduced the price of the copper

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breaching the contract in order to increase market share. This reduced the overall price of the
market breaking the cartel among the oligopolistic firms.

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Reference
Bauer, M.J.R., 2018. Principles of microeconomics.
Baumol, W.J., and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University
Press.
McKenzie, R.B., and Lee, D.R., 2016. Microeconomics for MBAs. Cambridge University
Press.