ECO202 - Specimen Paper For First batch PDF

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Download ECO202 - Specimen Paper For First batch PDF

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ECO202

Specimen Paper Attempt

Question 1

Demand function P = 6 -1/4Q Supply function P = 1/4Q Equilibrium = Demand = supply

6-1/4Q = 1/4Q 6 = 1/4Q+ 1/4Q 6 = 2/4 Q 6= ½ Q Equilibrium Quantity = 12K units Consumer Surplus = ½ x Equilibrium quantity x maximum price consumers are willing to pay in equilibrium = ½ x 12 x (6-3) = ½ x 12 x 3 = 18 Producer Surplus = ½ x Equilibrium quantity x Equilibrium price – minimum price to pay = ½ x 12 x (6-3) = ½ x 12 x 3 = 18

1.b.) Price elasticity using mid-point formula -:

( Q 1−Q ) (P1+P) (90 −120 ) (2+3) = (Q 1+ Q)( P 1− p ) (90+120 )(3−2)

=

−30 x 5 210 x 1

= |-0.714|

The price elasticity of demand is -0.714, therefore the demand curve is inelastic 1 when the price increases from $3 to $4, total revenue decrease from 270 to 240 by 30 dollars.

1biii.) When price elasticity is -0.714, demand curve is inelastic, there a increase in price will lead to an increase in demand. When price elasticity is -1.4, demand curve is elastic, therefore a increase in price will lead to a decrease in total revenue.

1c.) Above statement is invalid in the short run as long as a firm is able to cover its total variable cost, AVC, the firm should continue to operate. (Shutdown Rule is not Applicable) However in long run, as costs becomes variable cost. A producer needs to cover all costs in order to remain in operation in the industry. ( please revise again for better understanding)

Question 2 2a.)

Initially, supply and demand where at equilibrium E1 producing where Price is P1 and Quantity is Q1 In a Perfectly competitive market, firms are price- takers, P = MR, hence in the long run equilibrium, at the market equilibrium price, (Brand) is producing at the lowest point of ATC curve and is earning normal Profits at the optimal output where P=MR=MC-ATC.

Reduced Production Cost and Short-Run Market Situation (ii)

Brand will benefit from the invention since it will lower its fixed and variable costs. As a result, the MC and ATC curves will move lower to MC2 and ATC2. As Brand, is a price taker, brand will not be able to affect the market price of (Product) in a completely competitive market. As a result, the (Product) will not change instantly. Brand will make supernormal profits in the near run because it can create more outputs (Q2) at a lower cost than the market price (MR line).

Reduced Production Cost and Long-Run Market Situation (iii)

Due to low barrier of entry, other businesses will follow suit and adopt Brand's manufacturing approach to generate supernormal profits in the long term. These extraordinary profits will tempt more enterprises to enter the sector, and the industry will expand, expanding market supply. As a result, the market price of (Product) will decline until all companies, including Brand, make normal profits.

2b.)

Nash Equilibrium is when neither party has incentive to alter its strategy in this case there are (2) Nash equilibrium present. (Produce, Don’t Produce), and (Don’t Produce and Produce) for Firm B and Firm A respectively.

2bii)

With Subsidies

Firm B

Produce

Firm A Don’t Produce

Produce Don’t

(-5) , (20)

(100) , (0)

Produce

(0) , (125)

(0) , (0)

In context, the effect of subsidies has resulted in Firm A having the advantage over firm B which results in the best strategy of not producing / or competition with Firm A as the ideal strategy.

With Subsidies, Firm A will have a dominant strategy of always producing regardless of what strategy Firm B adopts. And that the new Nash equilibrium would be having Firm B to don’t produce and Firm A to produce at (0, 125).

Comparing the outcome between the former and the latter, where either Firms who produces and the other party not doing so to have a payoff of (100,0). After the subsidies, when both firm produces, Firm A will stand to gain (15 > -5) while if Firm A produces and Firm B not doing so will lead to a gain of (125>100). Whereas in Firm B’s context, by contesting with Firm A, it will result in a loss of (-5, 15) and therefore, it will be better to not compete.

Question 3 (TC1 – TC2)

No. Hour

Mu(x) 0 1 2 3 4

MB 2300 2200 2140 2100 2080

100 60 40 20

5

2075

5

Mywager at ei s$10. Themar gi nals av i ngsi nmont hl yr ent alduet o1hourofs ear c hi ng: 1.1hour:( 23002200) =100. 2ndhour:(21402200) =60 3r dhour:(2100–2140) =40 4t hhour:(20802100) =20 5t hhour:(20752080) =5 Sot heopt i mum hour l ys ear c hi s:4hour s.Ast hefi f t hhourwi l lgener at ear et ur nofmar gi nal benefitl es s ert hant hehour l ywager at eof$10.( 5...