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Business Economics

2 Pages 0 Downloads

  • Course Code: BUECO5903
  • Course Title: Business Economics
  • University: University of Manchester
  • Country: UK

Question 1:

(a) Illustrate and explain using diagrams of how a single seller within the market can maintain an inefficient allocation of resources.

(b) Are there any advantages to a single market seller and how do they compare to its perceived disadvantages.

(a) What market structure is used to benchmark allocative efficiency and why do we use it? Illustrate and explain using a diagram

(b) Why and how do monopolistically competitive firms fail to achieve allocative efficiency? Illustrate and explain using a diagram.

Question 2:

(a) What market structure is used to benchmark allocative efficiency and why do we use it? Illustrate and explain using a diagram

(b) Why and how do monopolistically competitive firms fail to achieve allocative efficiency? Illustrate and explain using a diagram.

Question 3:

(a) Assuming a constant wage rate, illustrate and explain using a diagram, how a firm’s marginal costs of production are at a minimum when its marginal product is at a maximum

(b) Illustrate and explain using a diagram how a firm’s long-run average cost curve comes into existence from a multi-plant operation;

(c) Identify and describe the significance of the various portions of this diagram. 

Question 4:

(a) You are examining and reporting on the market performance of a very small number of firms that are known to often collude in setting output prices and quantities. Illustrate and explain using a diagram what affect this behaviour is most likely to have on the allocation of factors of production.

(b) What will happen if one of these firms cheats on the others in some way? Illustrate and explain using a diagram.

Question 5:

Illustrate and explain using diagrams, the difference between long-run supply in a constant cost individual firm and industry and an increasing cost firm and industry.

Question 6:

Illustrate and explain using diagrams, two (2) market mechanisms that are used for controlling pollution as an externality.

Question 7:

(a) Explain whether you agree or disagree with the following statement and why: “Regardless of whether the short run or the long run is being considered, a firm should continue to operate as long as its price is greater than its average variable cost”.

(b) Use diagrams to illustrate and explain why you agree or disagree with the following statement: “When marginal revenue equals marginal cost, total cost equals total revenue and the firm makes zero profit”.

Solution

Question 1

A. The way in which a single seller within the market can maintain an inefficient allocation of resources:

When there is only one seller in the market then it is known as monopolistic in which one organization rules the market. They have dominant market power as the price is dominated by them in the marketplace. They set various prices by adjusting the output level to attain higher profits. It is the main reason they maintain an inefficient allocation of resources as they have all the power to fluctuate the price and they can increase the price to reduce consumer surplus.

B. Advantage and disadvantage to single seller:

Advantage: Single sellers have a monopolistic market structure in which price can be dominated by them in order to reduce consumer surplus. It helps them to enhance profitability. As there is an absence in such type of market so firms attain higher profits.  Disadvantage: Single seller are criticized by consumers because the higher price for goods is charged by them. Due to this reason, demand and sales of their products can be reduced. Firms that are adopting a monopoly structure are known for price discrimination where different prices are charged for the same product from different customers.

Question 2

A. The market structure which is used to benchmark allocative efficiency:

Perfect competition market structure is used to benchmark allocative efficiency because subnormal profits are made by all the organizations in this type of structure. As there is intense competition in the market so business entities make sure that the price which is set by them for products meets customer's expectation and enhance profitability.

B. Reason and the way in which monopolistically competitive firms fail to achieve allocative efficiency:

Monopolistically firms fail to achieve allocative efficiency because the price is dominated by them and a product is always priced higher than the marginal cost of it. It is the main reason why such types of firms are not able to attain allocative efficiency. All the organization's product products at an output that is lower than the output of the minimum actual total cost.

Question 6

A. Mechanisms that are used to control pollution:

There are various types of mechanisms that are used to control pollution as an externality. These are described below:

Allocation of property rights to the environment: Pollution in the environment takes place due to the absence of private property rights which results in market failure. 

Regulatory approaches: There are various types of regulatory approaches that could be implemented by the government in order to control environmental pollution. These are Performance and design standards which include water pollution acts, integrated pollution control licenses, etc.

Question 7

A. Agreeing or not agreeing with the statement:

Yes, the investigator is agreeing to the statement that a firm should continue to operate as long as its price is greater than its average variable cost because in this situation organisation will be able to generate profits. When the price gets lower than variable cost then a business entity then only a firm should take the decision regarding shutting down because in this condition a company may face huge losses.

B. Agreeing or disagreeing to the statement:

When marginal cost equals marginal revenues and total cost equals total revenues than in this situation business entities generate zero profits. Investigator agrees to this statement because when all the costs are recovered from revenues then it is not possible for firms to generate profits for the future.

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