Economics

B1
Given the following elasticities for Sony eBooks
Price elasticity of demand  1.8
Income elasticity  2.5

Based on this information,

i) To Find How much price decrease will facilitate 20 boost in eBook sales
Price elasticity  1.8   change in quantity demanded   change in price (Nordhaus, 2007).
Now, it is given that  change in quantity demanded  20.
Therefore,  change in price  20  1.8  11.1
Thus, the firm should lower its price by 11.1 to increase eBook sales by 20.

ii) To Find Impact of 5 income decline due to recession on eBook sales
Income elasticity   change in quantity demanded   change in income
2.5 (Nordhaus, 2007)    

Now, it is given that  change in income  5.
Therefore,  change in quantity demanded resulting from a 5 fall in income  5 x 2.5  10
Thus, a 5 fall in income will lower eBook sales by 10.


b) c) Complete the following cost schedule
QTotal CostATCMC050-11301308021809050325083.370435087.51005460921106600100140
Price  100

i) To Find Rate of output at which total revenue is maximised
Total revenue is maximized at the output where marginal cost is equal to price
(Nordhaus, 2007). Consequently, rate of output at which total revenue is
maximized is 4, since MC  Price at this output level.      

ii) To Find Rate of output at which ATC minimized
As per the calculated cost schedule, ATC is minimized when rate of output  3.

iii) To Find Rate of output at which profit per unit maximised
Economic profit per unit  Price  ATC. This will be maximized when ATC is
Minimized (Nordhaus, 2007). Consequently, rate of output which minimizes ATC
(making it 83.8) and maximizes profit per unit is 3.

B2. a)
OutputPriceTotal CostTotal RevenueMCMRTotal Profit0 24 100   -    --10121142142172182036615163152845891741238481031059504512-3-5
To Find Output level that maximises the firms profit, by comparing total cost and total revenue.
As per the total profit column is the above table, firms profit is maximized at output level  3
To Find Price that the firm should set to achieve maximum profit
Corresponding to the profit-maximizing output, the monopoly firms price  15.

b) Characteristics of an Oligopolistic Market
Small Number of Large Firms The oligopolistic market is dominated by a small number of large producers that enjoy considerable market share (Nordhaus, 2007).

Barriers to Entry Entry barriers such as patents, start-up costs and brand loyalty exist in oligopolistic markets. These barriers restrict the number of firms that enter into the market (Nordhaus, 2007).
Differentiated Products Firms in oligopolistic markets sell heterogeneous products giving consumers a wide variety of products and services (Nordhaus, 2007).

Interdependence A vital characteristic of oligopolistic markets is that firms in these markets are interdependent with the decisions of one firm influencing the decisions of another firm (Nordhaus, 2007).

Interdependence which elicits a firms responses to another firms actions is the consideration that monopolists do not have to worry about. Consequently, collusions, tacit or overt, price wars and the like are considerations for oligopolists and not for monopolists.

Firms in oligopolistic markets engage in non-price competition along with price competition. Non-price competition methods include i) advertising or promotional competition, ii) product differentiation and iii) barriers to entry (Nordhaus, 2007).

B3.a) Given the following graph
Price MC

         P3
    ATC

        P2
      AVC



       P1
       P0



0 Q0 Q1 Q2   Q3
Figure 1

i) To Find Price below which a perfectly competitive firm will shut-down in long run
In perfect competition, MR is always equal to Market Price. Thus, a firm will produce at those quantities and output at which MC  P. In the long-run a form will shut down for prices below zero-economic profit point which occurs at intersection of P, MC and ATC (Nordhaus, 2007). Thus, the firm will shut down below price P2 (Figure 1).

ii) To Find Price below a perfectly competitive firm will shut-down in the short run
Shutdown point in the short-run occurs at the point where MR or P just covers variable costs i.e. MR  P  AVC (Nordhaus, 2007). This occurs at price P1. A firm would shut down at any price below it. Therefore, the firm will shut down in the short run at price P0 (Figure 1).

iii) To Find Price and quantity at which this firm will make super-normal profits
The firm will make super normal profits when average revenue (equal to price) exceeds average total cost (ATC) (Nordhaus, 2007). As per figure 1, super normal profits will occur at price P3 and quantity Q3.

iv) To find Price and quantity at which this firm will make normal profits
A firm will make normal profits at the point at which MC  P  ATC. This occurs at price P2 and quantity Q2 (Figure 1). Thus, the firm will make normal profits at price P2 and quantity Q2.    

a) In the long-run, there is no difference between monopolistic competition and perfect competition. Assessing the statement with respect to the following

price charged to consumers
In perfect competition P  MR  MC  AR  AC at equilibrium (Nordhaus, 2007).
However, P  MR in the long-run monopolistic competition, negating the aforementioned statement.

the average total costs
In perfect competition ATC  MR at equilibrium (Nordhaus, 2007).
However, ATC  MR in the long-run monopolistic competition
negating the aforementioned statement

the typical firms profit in the long run
Both monopolistic and perfectly competitive firms enjoy zero-economic profits in the long-run (Nordhaus, 2007). Thus, they are not different in any regard in terms of long-run equilibrium, in accordance with the given statement.

B4.       a)    Price  10

QVCTCATCAVCMCP TRMRProfit12141422101010-423157.51.51102010535175.71.72103010134820523104010205132552.651050102562335 5.83.81010601025738507.15.415107010208 698110.18.631108010-1

b)
i) To Find Firms fixed cost
Firms fixed cost  TC  VC (at any output level)  14  2  12

ii) To Find Profit-maximising rate of output for this firm
Profit maximizing output is the output at which MC  MR (Nordhaus,
2007). This occurs when output level  6.

iii) To Find Number of bundles the firm will produce if price rises to 15
If price rose to 15, then MR  15, for all output values, since the firm
is operational is a perfectly competitive market. Profit will be maximized
and equilibrium attained when MR  MC (Nordhaus, 2007) i.e. at the
output level where MC  15. This MC value is attained when output  7.
Thus, the firm will produce 7 bundles if price rises to 15.

iv) To Find Profit at the new price
Profit  TR  TC  p x q  TC (Nordhaus, 2007).