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Question 1:  
(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.  
(2.5 marks for the diagram plus 2.5 marks for the explanation)  
(b) What will happen if one of these firms cheats on the others in some way?  Illustrate and explain using a diagram.  
(2.5 marks for the diagram plus 2.5 marks for the explanation)   
Question 2:  
(a) What market structure is used to benchmark allocative efficiency and why do we use it?  Illustrate and explain using a diagram    
(2.5 marks for the diagram plus 2.5 marks for the explanation)  
(b) Why and how do monopolistically competitive firms fail to achieve allocative efficiency?  Illustrate and explain using a diagram.  
(2.5 marks for the diagram plus 2.5 marks for the explanation)   
Question 3:  
What will happen to the equilibrium price and quantity of butter in each of the following cases?  
Illustrate with a diagram and explain whether demand or supply (or both) have shifted and in which direction?  (In each case, assume ceteris paribus).   
(a) A rise in the price of margarine;  (1 mark)  
(b) A rise in the demand for yoghurt;  (1 mark)  
(c) A rise in the price of bread;  (1 mark)  
(d) An increase in the demand for bread; (1 mark)  
(e) An expected rise in the price of butter in the near future; (1 mark)  
(f) An tax on butter production; (2.5 marks)  
(g) The invention of new but expensive process, for removing all cholesterol from butter, plus the passing of a law which states that all butter producers must use this process.  (2.5 marks)  
 3
Question 4:  
(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.  
(2.5 marks for the diagram plus 2.5 marks for the explanation)  
(b) Illustrate and explain using a diagram how a firm’s long-run average cost curve comes into existence from a multi-plant operation.  
(2.0 marks for the diagram plus 2.0 marks for the explanation)  
(c) Identify and describe the significance of the various portions of this diagram.  (1 mark)    
Question 5:  
Illustrate and explain using diagrams, two (2) market mechanisms that are used for controlling pollution as an externality.  
[2.5 marks for each diagram (total of 5 marks) plus 2.5 marks for each explanation (total of 5 marks)]   
Question 6:  
(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”.  
(5 marks)  
(b) 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”.  
(5 marks)   
Question 7:  
(a) Illustrate and explain using diagrams, the difference between long run supply in a constant cost individual perfectly competitive firm and industry and an increasing cost individual perfectly competitive firm and industry.  
(Firm level diagrams 2.5 marks; industry level diagrams 2.5 marks, firm level explanation 2.5 marks, industry level explanation 2.5 diagrams)  
 4  
Question 8:  
The  following diagram shows the cost curves of a firm under perfect competition.  
0 1 2 3 4 5 6 7 8 9 10 11 12
0 10 20 30 40 50 60 70 80 90 100
MC
MC
AC
AVC
$
Quantity
 (a) How much will the firm produce in order to maximise profits at a price   of $8 per unit?                                                                                 
 (b) What will be its average cost of production at this output?
 (c) How much (supernormal) profit will it make?
 (d) How much will the firm produce in order to maximise profits at a price   of $5 per unit?                                                                                     
 (e) How much (supernormal) profit will it make?
 (f) How much will the firm produce in order to maximise profits at a price   of $4 per unit?                                                                                    
 (g) What will be its profit value be now?
 (h) Below what price would the firm shut down in the short run?  
 (i) Below what price would the firm shut down in the long run?
 5
Question 9:   
(a) Suppose the income elasticity of demand for pre-recorded music compact disks is +5 and the income elasticity of demand for a cabinet maker’s work is +0.7.  Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of an economic expansion that increases consumer incomes by 20 per cent. (2 marks)  
(b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other? (2 marks)  
(c) Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; (3 marks total, 1.5 marks per part)  
YED= +0.5 and YED= -2.4     (d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part)  
XED= + 0.65 and XED= -3.6 



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