Posted: September 15th, 2015

Characteristics of a monopolistically competitive firm.

(a) Define and explain the characteristics of a monopolistically competitive firm. Assuming identical long-run cost curves, compare graphically (use 2 graphs) the prices and outputs that would result under the long-run monopolistic competition and perfect competition. Evaluate the differences between these two market structures.
(b) From society’s point of view, why monopolistic competition is considered as an ideal market structure? Explain.
(c) Define, illustrate and explain the method of price discrimination used by the airlines industry with an example.
Question 2: Refer to Chapter 7- Market Failure and Government Policy
(a) Assume that a firm discharges waste into a river. As a result, the marginal social costs (MSC) are greater than the firm’s marginal (private) costs (MC). The table below shows how MC, MSC, AR and MR vary with output. Assume that the marginal private benefit (MB) is given by the price (AR). Also assume that there are no externalities on the consumption side, and that therefore MSB = MB. Study the table and answer the following questions.

Output 1 2 3 4 5 6 7 8
MC 23 21 23 25 27 30 35 42
MSC 35 34 38 42 46 52 60 72
TR 60 102 138 168 195 219 238 252
AR 60 51 46 42 39 36.5 34 31.5
MR 60 42 36 30 27 24 19 14

(i) How much will the firm produce if it seeks to maximise profits?
(ii) What is the socially efficient level of output? (1 mark)
(iii) How much is the marginal external cost at this level of output?
(iv) What size of tax would be necessary for the firm to reduce its output to the socially efficient level?
(v) Why is tax less than the marginal externality? Explain.

(b) Consider the following externalities, and explain if there would be external effects associated with any of the following activities, and if so, what would be the nature of the externality in each case?

(i) A hotel that is located next to an apartment building and plays loud music late at night.
(ii) Being vaccinated for polio, influenza or swine flu.
(iii) Can you think of government policies that might deal with each of the two external effects?

Question 3: Refer to Chapter 9- Introduction to Macroeconomics

(a) Using the circular flow model, explain why the value of businesses’ output (goods and services) equals the income of the households?

(b) As shown in table below a small economy of Day Dream Island produced the following final goods and services during the month of May 2015. Calculate the value of the output at the given market price for this economy.

Items Quantity Price ($)
Food (Kilos) 1, 000000 2
Houses 30 150,000
Medical services (hours) 35,000 40
Shirts 30,000 25
Speedboats 2 240,000
(c) The table below gives the national accounts data for Australia for a given year in 2010.

Amount ($)
Billion
Gross Private Domestic Investment 855
Government Consumption Expenditure 620
Government Investment Expenditure 195
Household Consumption Expenditure 3120
Taxes 600
Import 575
Exports 680
Savings 300

(i) From the above table, calculate GDP and the country’s gross national expenditure (GNE) using the expenditure approach.

Question 4: Refer to Chapter 10- The Determination of GDP
(a) Refer to the above table in Q3 (c) and calculate the level of Injection (J) and Withdrawal (W) for Australia. Based on W and J, what will happen to GDP growth?
(b) How does a deflationary-gap differ from an inflationary-gap? Illustrate and explain.
(c) Illustrate and explain how the equilibrium level of GDP is determined, by applying the Keynesian income and expenditure model?
(d) Why do you think that the macroeconomic policy makers should worry about structural unemployment? How does it differ from frictional and cyclical unemployment?
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