Principles of Economics: ECON11026

Code: ECON11026

Subject: Principles of Economics

Assessment 2 – Short Answer Questions

Q1. Market structures chapter 5 (7 marks)

(a) Draw graphs and explain why perfectly competitive firms’ are price takers? (2 mark)

(b) Draw graphs and explain why perfectly competitive firms make short run loss, short run economic profit, and normal profits in the long run? (5 marks)

Q2. Market structures chapter 5 (7 marks)

(a) Why a firm is called a natural monopolist? Give examples, draw a graph and explain. (3.5 marks)

(b) Is a profit maximising monopoly firm always technically efficient? Draw a graph and explain. (3.5 marks)

Q3. Market structures Chapter 6 (7 marks)

(a) What do you understand by the concept of interdependence of firms under oligopoly market structure? Give examples and explain. (1 marks)

(b)What assumptions concerning a rival’s responses underlie the kinked demand curve? Give example, draw a graph and explain. (2 marks)

(c) Draw graphs and explain the long run situation of monopolistic competition and perfect competition? (2 marks).

(d) In what way is monopolistic competitive firm superior and inferior to perfect competition? In other words serves the public interest. Based on the assumptions and referring to graphs from part c, explain. (2 marks)

Q4. Market Failure and Externalities Chapter 7 (7 marks)

(a) What are the three types of goods classified by Economist? List and explain their characteristics with examples. (3 marks)

(b) The Table 1 below gives the costs and benefits of an imaginary firm operating under perfect competition whose activities create a certain amount of river pollution. (It is assumed that the costs of pollution to society can be accurately measured).

Table 1 Output (units)	Price per unit $ (MSB)	Marginal private Costs to the firm $ (MC)	Marginal external pollution $ costs (MEC)	Marginal social costs (MSC = MC + MEC)
1	100	30	20	50
2	100	30	22	52
3	100	35	25	60
4	100	45	20	75
5	100	60	40	100
6	100	78	55	133
7	100	100	77	177
8	100	130	110	240

(i) What is the profit maximizing level of output for this firm? Applying this example, draw a graph of negative externality in production and explain? (2 marks)

(ii) What is the socially efficient level of output? (1 mark)

(iii) Why might the marginal pollution costs increase in the way shown in this example? (1 mark)

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