ECO274+_F_+Question-+Aug+2013

# 2 marks c calculate the total revenue first from the

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(2 marks) c) Calculate the total revenue first from the sale of houses at a price of \$400 and then at a price of \$500. (2 marks) d) Suppose that when an average customers income increases rises from \$18,000 to \$22,000 per year, annual housing purchases increase from 5,500 units to 6,700 units. Calculate the income elasticity of demand. Is housing a normal good? Why or whynot? (3 marks) 4 . a) Suppose that a typical monopolistically-competitive firm faces thefollowing demand, marginal revenue, total cost and marginal cost equations for its product: Q = 55 - 2.5P MR=22-0.8Q TC = 216 - 20Q + Q² MC= -20 +2Q Where P is the price of the product and Q is the number of unitsproduced. (i) What is the firm’s profit-maximizing price and output level? (2 marks) (ii) What is the relationship between P and ATC at the profit maximizingoutput level? (1 mark) (iii) Is this firm earning an economic profit? Is this firm in short-run or long-run monopolistically competitive equilibrium? Will newfirms enter into or exit from this industry? (3 marks) b) Explain FOUR (4) kinds of goods in economics. (4 marks)

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ECO274 (F) / Page 12 of 14 SECTION C Instructions: This section consists of TWO (2) questions. Answer any ONE (1) question in the answer booklet provided. All questions carry equal marks. Question 1 a) The Meetoo Company produces shirts at a factory in Singapore. The shirts are currently sold at \$15 each but cost \$18 to produce (AFC=\$4, AVC=\$14). Mike Smart, chief accountant, has advised the board in New York to shut down the Singapore factory. What is your view? What other information might you need before reaching a decision? (5 marks) b) The following table shows a car manufacturer’s total cost of producing cars: Construct a table and for each level of output, calculate total variable cost (TVC), average variable cost (AVC), Average total cost (ATC), average fixed cost (AFC) and marginal cost (MC). Output TC TVC AVC ATC AFC MC 0 500,000 1 540,000 2 560,000 3 570,000 4 590,000 5 620,000 6 660,000 7 720,000 8 800,000 9 920,000 10 1,100,000 (15 marks) c) With an appropriate diagram, explain economies and diseconomies of scale. (5 marks) Question 2 a) List FIVE (5) Characteristics of a perfect competition market.
ECO274 (F) / Page 13 of 14 (5 marks) b) Use the figure below to answer the following questions. (i) How can you determine that the figure represents a graph of a perfectly competitive firm? (2 marks) (ii) What is the market price? (2 marks) (iii) What is the profit - maximizing output? (2 marks) (iv) What is total revenue at the profit - maximizing output? (2 marks) (v) What is the total cost at the profit-maximizing output? (2 marks) (vi) What is the profit or loss at the profit - maximizing output? (2 marks) (vii) What is the firm's total fixed cost? (2 marks) (viii) Identify the firm's short - run supply curve. (2 marks) (ix) Is the industry in a long-run equilibrium? Why or why not? (2 marks) (x) In long-run equilibrium, what is the firm's profit maximizing quantity? (2 marks)

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ECO274 (F) / Page 14 of 14 —THE END— ECO274/ (F) August 2013/Mehdi Tasaloti/12-09-2013
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