Instructions when completing the assessment:
Each question should have the following:
An introduction (discuss key terms)
Graphs (where required, label the axes and curves and indicate any changes)
Discussion (of findings in the graph)
Question 1 15 Marks
Since a competitive firm can sell all its output at the market rice, it has only one decision to make: how much to produce. Should it produce all the output it can or should it produce at less than capacity?
- Complete the cost and revenue schedules below.
- Graph MC and P.
- What is MC at that rate of output?
|Quantity||Price||Total revenue||Total cost||Marginal cost|
Question 2 10 Marks
A firm that produces the entire market supply of a particular good or service has the ability to alter the market price of a good or service.
- Use the table given below and graph the demand, marginal revenue, and marginal cost curves.
- What is the profit-maximizing rate of output and price for a monopolist? How much profit does the monopolist make?
The following table indicates the prices various buyers are willing to pay for a GT7 sports car.
|Buyer||Maximum price||Buyer||Maximum price|
|Buyer A||$50 000||Buyer D||$20 000|
|Buyer B||40 000||Buyer E||10 000|
|Buyer C||30 000|
The cost of producing the cars includes $50 000 of fixed costs and a constant marginal cost of $10 000.
Question 3 15 Marks
Suppose that Shining Stone is a single-price monopolist in the market for diamonds. Shining Stone has five potential customers: Buyer A, Buyer B, Buyer C, Buyer D, and Buyer E. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Buyer A’s willingness to pay is $400; Buyer B’s, $300; Buyer C’s, $200; Buyers D’s, $100; and Buyer E’s, $0. Shining Stone’s marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table.
|Price of Diamond (AED.)||Quantity of Diamonds Demanded|
- Calculate Shining Stone’s total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve.
- Explain why Shining Stone faces a downward-sloping demand curve.
- Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond.
- Suppose Shining Stone currently charges $200 for its diamonds. If it lowers the price to $100, how large is the price effect? How large is the quantity effect?
- Add the marginal cost curve to your diagram from part (a) and determine which quantity maximizes Shining Stone profit and which price Shining Stone will charge.
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