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INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C
DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
45 Objective Questions
MARKS
10
10
10
Date: 22/11/2010
Signature:
Assignment B
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Assignment C
Assignment A
Five subjective questions (3*5 =15 marks)
Q1 Explain the relationship between different determinant of demand and the
quantity demanded.
Answer:
determinant of demand: are factors affecting the demand curve, a fundamental
factor influencing buyers' demand for goods and services. There are six determinants
of demand: price if the commodity, price of related goods, income of the consumer,
tests and preferences of the consumer, future expectations of the consumer, and the
other factors.
Any change in any one of these determinants causes a change in demand.
1. Price of the commodity: If the price of a commodity falls, the quantity
demanded increases and vice-versa. Thus there is an inverse relationship
between the price of a commodity and its quantity demanded.
2. Prices of related goods: Related commodities are of two types:
a)
b)
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A person has $15,000 and needs to buy a car, or start a smalll business. He can
either buy the car, or star his own business. If he buys the car the opportunity
cost of that decision is lost potential earnings of starting the business, and if
he choses to starts a business the opportunity cost is the lost potential benefits
of buying the car.
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A person who decides to quit his job and go back to school to increase his
future earning potential has an opportunity cost which is the lost wages for the
time he is in school. Conversely, if he elect to remain employed, then the
opportunity cost is the lost potential wage increase.
You go shopping for new clothes; there are hundreds you could buy with the
limited fund. Finally, it comes down to a jeans and sneakers if the choice is
jeans, the opportunity cost is sneakers & vice versa.
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According to this law, if a firms all factors of production are increased in the same
proportion, the output of that firm may increases in the same proportion, this is
know as returns to scale are constant. If the output increases more than
proportionately, it is said to be increasing returns to scale, and when the output
increases less than proportionately, it is called decreasing returns to scale.
Increasing returns to scale: Is an increase in output, that is proportionally greater
than a simultaneous and equal percentage change in the use of all inputs, resulting in
a decline in average costs.
Returns to scale: is a production process with neither economies nor diseconomies
of scale: the output of the process increases or decreases simultaneously and in step
with increase or decrease in the inputs. A plant, with a constant returns to scale is
equally efficient in producing small batches as it is in producing large batches. See
also declining returns to scale and economies of scale.
Decreasing returns to scale: is production process with diseconomies of scale: the
output of the process either increases in progressively smaller increments, or
decreases simultaneously and in step with increase in inputs. A plant with a declining
returns-to-scale is inefficient in producing batches larger than a certain (optimum)
size. Also called, decreasing returns to scale. See also economies of scale and constant
returns to scale.
Input
LRAC
Diseconomies of
Scale
Economies
of Scale
Constant Return
to Scale
Output
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Assignment: B
Three subjective Questions
Q1 What is meant by price discrimination? Illustrate the third degree price
discrimination assuming two markets. (Show diagram also)
3
Answer:
Price discrimination occurs when a firm charges different prices to different
customers for reasons other than differences in costs.
Koutsoyiannis said: Price discrimination exists when the same product is sold at
different prices to different buyers.
J.S. Bain said: Price discrimination refers strictly to the practice by a seller of
charging different prices from different buyers for the same good.
Mrs. Joan Robinson said: Price discrimination is the act of selling the same article
produced under single control at different price to different buyers.
Stigler said: Price discrimination refers to the sale of technically similar products at
prices which are not proportional their marginal cost.
There are three different types or degrees of price discrimination; First Degree Price
Discrimination; which involves charging consumers the maximum price that they are
willing to pay. There will be no consumer surplus. Second Degree Price
Discrimination; this involves charging different prices depending upon the quantity
consumed. And Third Degree Price Discrimination; it involves charging different
prices to different groups of people.
In third degree price discrimination, price varies by attributes such as location or
by customer segment, or in the most extreme case, by the individual customer's
identity; where the attribute in question is used as a proxy for ability/willingness to
pay.
Additionally to third degree price
discrimination, the suppliers of a
market
where
this
type
of
discrimination is exhibited are capable
of differentiating between consumer
classes.
Examples
of
this
differentiation are student or senior
discounts. For example, a student or a
senior consumer will have a different
willingness to pay than an average
consumer, where the reservation price
is presumably lower because of budget
constraints. Thus, the supplier sets a
lower price for that consumer because
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the student or senior has a more elastic price elasticity of demand. The supplier is
once again capable of capturing more market surplus than would be possible without
price discrimination.
Q2 In a perfectly competitive market, while an industry is a price-maker, an
individual firm is a price taker. Elaborate it
3
Answer:
Perfect competition is a market structure in which, there is a large number of buyers
and sellers and each buys or sells only a tiny fraction of the total market quantity;
sellers offer a standardized product; and sellers can easily enter or exit from the
market. Each perfectly competitive firm can sell as much as it wishes at the market
price.
In perfect competition, the market sums up the buying and selling preferences of
individual consumers and producers, and determines the market price. Each buyer
and seller then takes the market price as given, and each is able to buy or sell the
desired quantity. Thus, a firm that is operating in a perfectly competitive market will
be a price-taker, because there are so many producers of the same product and all
have the perfect knowledge of the market and there is only one buyer of that
product, so no body can decide the price of the commodity on behalf of others. That
is why a firm under perfect competition is a price taker and not a price maker. As part
of the industry, the firm has to simply charge price determined by the industry. If the
firm charges more price, it will lose sales and if it charges less price it will incur losses.
The typical example of perfect competition is agriculture. The products are
indistinguishable. There are many potential suppliers. This makes the farmer a price
taker; if he or she prices the product higher than the market price, he or she will not
make any sales or make fewer sales, thus incurring loss. Thus the farmer has to go
with the price determined by the industry in order to survive
A price-taker cannot control the price of the good it sells; it simply takes the market
price as given. The conditions that cause a market to be perfectly competitive also
cause the firms in that market to be price-takers. When there are many firms, all
producing and selling the same product using the same inputs and technology,
competition forces each firm to charge the same market price for its good. Because
each firm in the market sells the same, homogeneous product, no single firm can
increase the price that it charges above the price charged by the other firms in the
market without losing business. It is also impossible for a single firm to affect the
market price by changing the quantity of output it supplies because, by assumption,
there are many firms and each firm is small in size.
Q3 Explain the meaning of welfare economics and the Pareto optimality
Criterion of social welfare
3
Answer:
welfare economics is branch of economics dealing with how well off people are, or
feel themselves to be, under different states of affairs. Sometimes it is regarded as the
normative branch of economics.
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CASE STUDY
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Answer:
The above example of fast food industry in India is describing a monopolistic
competition market no doubt about that. My reason for saying that is a monopolistic
competition is a market structure in which there are many firms selling products that
are differentiated, yet are still close substitutes, and in which there is free entry and
exit. So a monopolistically competitive market has three fundamental characteristics:
1. Existence of Many buyers and sellers;
2. No significant barriers to entry or exit; and
3. Differentiated products.
Other examples which are similar to fast food industry include automobile,
restaurants, and hotel, industries. There are more than a dozen companies selling
cars, like: General Motors, Ford, Daimler Chrysler, Mazda, Toyota, Honda, Volvo,
Nissan, Jeep, BMW, Volkswagen and several more. Each of these firms supplies a
relatively large part of the market, so each can affect the market price. Moreover, the
product of each firm is different from the products of the others: A Toyota is not a
Ford, and a Ford is not a Jeep.
Q2 What are the marketing strategies followed under monopolistic
competition?
(3)
Answer:
Monopolistic competition refers to a market structure in which there are many sellers
selling similar but differentiated products and there is existence of free entry and exit
of firms.
Answer:
The marketing strategies followed by firms operating in a monopolistic competition
market is to differentiate its products from the products of others, hence each firm
sells a product that is differentiated in important ways in the type of design,
services, appearance, accessories, recipes used, atmosphere, location, and even the
friendliness of the staff.
Sometimes product is differentiated by it's the quality. By many objective standards,
longevity, performance, frequency of repair. In other cases, the difference is a matter
of taste rather than quality. Ultimately, though, product differentiation is a subjective
matter: A product is different whenever people think that it is, whether their
perception is accurate or not.
Since the firm produces a differentiated product, it can sell more by convincing
people that its own output is better than that of other firms. Such efforts, is called
non-price competition, which indicates any action taken by a firm to increase the
demand for its output without cutting its price.
Better service, product guarantees, free home delivery, more attractive packaging, as
well as advertising to inform customers about these things, are all examples of nonprice competition.
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Assignment C
Q1 The goods that can be substituted with each other are known as:
(a) Complementary goods
(b) Competitive goods (
)
(c) Inferior goods
(d) Veblen goods
Q2 Law of demand state that:
(a) Price is inversely proportional to quantity demanded (
)
(b) Price is inversely proportional to 1/quantity demanded
(c) Not related
(d) None of the above
Q3 Law of supply states that:
(a) Price is inversely proportional to supply
(b) Price is inversely proportional to 1/suppy
(c) Price and supply are constant (
)
(d) Price and supply are not related
Q4 At equilibrium price:
(a) Quantity demanded> Quantity supplied
(b) Quantity demanded< Quantity supplied
(c) Quantity demanded is not equal to quantity supplied
(d) Quantity demanded is equal to Quantity supplied (
)
Q5 Demand for a Quantity is perfectly inelastic when:
(a) When quantity demanded changes with price
(b) When quantity does not change with price (
)
(c) Quantity demanded increases with decrease in price
(d) Quantity demanded decreases with increase in price
Q6 Which of the following is the best example of the law of demand?
a. As the price of fur coats decreases, more consumers will buy them. (
)
b As the price of fur coats increases, more consumers will buy them.
c. As the price of fur coats decreases, people buy more wool jackets.
d. As the price of fur coats increases, people buy more leather jackets.
Q7The price of an item drops 10% in such a way that the Price Elasticity of Demand
of that item is unit-elastic. We would expect the quantity of the item demanded to
(a) drop by 5%
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Constant Technology
Homogeneous factor units (
)
Short-Run
Factor proportions are constant
Q10 The main cause of the operation of diminishing returns to scale is that:a) Internal and external economies < internal and external diseconomies
(
)
b) Internal and external economies> internal and external diseconomies
c) Internal and external economies= internal and external diseconomies
d) None of the above
Q11 Which of the following is not an external economy:a)
b)
c)
d)
Economies of concentration
Managerial economies (
)
Economies of Disintegration
Economies of Localisation
TC=FC+VC (
)
TC=FC-VC
TC=VC-FC
TC=FC+VC/2
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Q14 The relationship between Average Cost Curve and Marginal Cost Curve of a
firm is:a) When AC is falling, MC is falling at a much faster rate and stays below AC.
b) At lowest point of the AC curves MC becomes equal to AC.
c) When AC starts rising, MC rises at a much faster rate & the MC curve is
always above the AC curve
d) All the above.
15 Increasing returns to scale for a firm are shown graphically by
A) Returns to scale have nothing to do with the shape of the long-run average cost
curve.
B) a horizontal long-run average cost curve.
C) a vertical long-run average cost curve.
D) an upward-sloping long-run average cost curve.
E) a downward-sloping long-run average cost curve. (
)
16 When cost curves are drawn for a firm, all of the following are generally assumed
EXCEPT
A) Average fixed costs are constant. (
)
B) firm is too small to influence factor prices.
C) average variable cost initially declines, and then rises at higher output levels.
D) total fixed costs are constant.
E) marginal product of the variable factor eventually declines.
17 Consumer surplus
A) is the difference between what the consumer is willing to pay for all the
units consumed and what he/she actually paid. (
)
B) is the total value that a consumer receives from a purchase of a particular good.
C) is a measure of the gains a consumer receives in the market.
D) is the sum of the marginal values to the consumer.
E) is the consumption of a commodity above and beyond the amount required by the
consumer.
18 The supply curve remains the same if there is a change in
A) the number of suppliers of the commodity
B) technology.
C) the price of the good
D) the price of a commodity that is a substitute or complement in production.
(
)
E) factor costs.
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true
false (
)
may be
None of the above.
34 Oligopolists are less likely to experience price rigidity when they have excess
capacity than when they are near full capacity
A. true
B. false (
)
C. may be
D. none of the above
35 The resources in an economy are:
a)
b)
c)
d)
Constantly increasing
Fixed at any moment (
)
Constantly increasing
None of the above
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Q37 .The marginal productivity theory states that under perfect competition, price of
each factor of production will be:a)
b)
c)
d)
Q38.The factor price for the industry is determined by the point where:a)
b)
c)
d)
Homogeneous factors
Perfect Competition
Short-run analysis (
)
Law of diminishing marginal returns
Q40. In order to attain the equilibrium position a firm will employ laborers up to a
point where their respective:a)
b)
c)
d)
MRP>wage rate
MRP<wage rate
MRP <=wage rate
MRP=wage rate (
)
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