Question

# Q1. In a perfectly competitive market, state the condition (clearly)

that causes firms to enter the market? When does the entry and exit of firms from the perfectly competitive industry end? (4 marks)

Q2. Given a production function Q = f (K, L) = 4K2 + 2L2, both capital and labour are tripled, does this production function display increasing, decreasing or constant returns to scale? Show the complete working and explain. (4 marks)

Q3. Complete the following cost table given below and additionally state all the formulae used: (6 marks)

Q4. A perfectly competitive firm has a marginal cost given by MC(q)  0.25q and a total cost function of TC = 2 + 0.125q2. The Total Revenue TR = 12q. (6 marks)

-What is the profit-maximizing price for this perfectly competitive firm?
-What is the condition to find equilibrium output? What is equilibrium output for this particular firm?
-Draw a diagram and shade the area of Producer's Surplus and calculate the firm's producer's surplus

Q5. FoodGiant and MiniCrunch are two big burrito restaurant chains. Each restaurant is weighing out their pros and cons and considering the other firm's reaction to take an important decision on pricing next week. Each firm is faced with two option: to charge a high price or to charge a lower price. If both firms charge a higher price, they make profits of \$2500 each, while if both firms choose to charge a lower price, they make \$4000 in profits. If one firm chooses charge a lower price while the other charges a higher price, the former makes a profit of \$4500 while the latter makes \$1000. Draw the payoff matrix for FoodGiant and MiniCrunch. Find the dominant strategy for each firm and subsequently the Nash Equilibrium. Have both firms maximized profits? Why or why not? Explain. (6 marks)

Q6. A firm faces a market demand equation Q= 30 - P and a total cost function of TC (Q) = Q2/2 with a marginal cost MC(Q) = Q. (10 marks)

-What type of firm is this? How do you know?
-Find the profit maximizing price and quantity of the firm while mentioning the condition that results in profit maximization.
-Calculate the profit made by the firm in part (b)
-Is the firm maximizing welfare? If not, what price would the firm now charge?

Q7. It can be noted that the demand curve that monopolistically competitive firm is more elastic as compared to the one faced by a monopoly seller. Explain why this is true. (Hint: Think carefully about the characteristics of each market) If a monopolistically competitive firm makes super-normal profits in the short-run, what will happen to the demand curve as they move towards the long-run? (5 marks)

Q8. Oligopolies are faced with a unique case of price rigidity. Explain why oligopoly sellers tend to be price rigid. Draw a neatly labelled diagram and explain. (3 marks)

Q9. A firm sold 20,000 SD cards at \$50 each in the previous year. The firm also spent \$600,000 on hiring labour, \$50,000 on capital equipment and \$200,000 on raw materials. If the factory is on a land that could have been rented out for \$30,000 per year if it wasn't being used- State the formulae and calculate accounting profit and economic profit. (3 marks)

Q10. If there are two separate groups of buyers that are physically isolated from each other, it was seen that a monopolist would rather charge two unique prices to each group rather than a uniform price. Why is this true and which model studies this? Why is it that the two groups need to be isolated from each other? (3 marks)  