Explain natural monopoly and cross elasticity, Business Economics

Question 1

Part A - The following schedule shows the market for oranges. Use this data to answer the questions below. Provide full calculations for all your answers.

(i) Graph the demand and supply curves for the orange market. Title your diagram, label the axes and label the demand and supply curves

(ii) Indicate the market equilibrium point on your diagram and clearly show the areas of consumer surplus and producer surplus

(iii) Explain what it means and what would happen in the market if the price was set at $6 per case and demonstrate this on your diagram

(iv) Explain what it means and what would happen in the market if the price was set at $3 per case and demonstrate this on your diagram

(v) Suppose demand increases by 40 cases per day at each price level. Draw both the old and new demand and supply curves on a new diagram to demonstrate the effect. Explain the factors that could make this happen

(vi) Demonstrate on a diagram the impacts of a subsidy of 50 cents per unit paid by the Government to orange growers. What will be the new equilibrium price and quantity? How much will this cost the Government in total subsidy?

 Part B  Answer the questions from the scenarios given below

a) The price of cappuccino coffee increases from $1.60 to $1.80 per cup. The quantity of chocolate-flavoured milk sold increases from 2,000 to 2,500 cartons per week. The quantity of cup cakes sold decreases from 1,000 to 900 per week.

Calculate and explain the cross elasticity of demand between:

(i) Cappuccino coffee and chocolate-flavoured milk

(ii) Cappuccino coffee and cup cakes

b) As a result of incomes rising by 10% people purchase 15% more health care at a given price.

(i) Calculate the income elasticity of health care

(ii) Explain what this means with respect to the type of good

Part C -  Use demand-supply market analysis to graphically illustrate and analyse each of the following scenarios (in the short run). Explain the changes with respect to demand and supply determinants. Identify for each what the effects on price and quantity would be.

i) The market for small cars when the price of petrol increases  

ii) The market for overseas travel when income increases

iii) The market for computers as production costs rise

iv) The market for tea when the price of sugar rises

v) The market for new models of flat screen TVs if there is a large increase in the number of TV commercials promoting new models of televisions

vi) The market for housing if there is a significant increase in immigration

Question 2

Part A -  The table below shows the market facing a firm producing a particular

(i) Complete the table and graph the demand curve

(ii) Explain whether you would advise the firm to raise the price from $200 to $225. Provide justification for your advice with reference to elasticity and total revenue

(iii) Identify the firm's level of production that is likely to maximise revenue. Demonstrate this on a diagram. Explain why you choose this point

Part B -The table below shows a cost schedule for a firm operating under conditions of perfect competition

(i) Complete the table

(ii) Using the numbers from the table above, draw a diagram showing Marginal Cost, Average Total Cost, Average Variable Cost and Average Fixed Cost curves

(iii) Find the profit maximising output if the price is $115. What is the maximum profit at this level of output? Illustrate the profit area on your diagram

(iv) Repeat the analysis to find revenue and maximum profit if the price per unit is $40. What is the appropriate strategy for the firm in the short run?

Part C -

The table below shows similar cost information, but now applies to a monopoly firm.

(i) Complete the table

(ii) Using the numbers from the table above, draw a diagram showing how a monopolist makes decisions regarding production levels

(iii) Identify the level of output and price under monopoly market structure

(iv) Explain the different production decisions between monopoly and perfect competition

(v) Demonstrate and explain the level of resource misallocation (deadweight loss) when comparing the outcome under the monopoly situation with the outcome under perfect competition (where the price is $115 per unit)

Part A -

i) Explain the four types of market structures, and identify the key factors that distinguish them

ii) Explain how producers in each market structure make price and output decisions. Use diagrams to demonstrate

iii) Demonstrate and explain how a natural monopoly might arise

iv) Explain which market structures would use advertising. Why? Why not?

Part B -

i) Choose two different industries from your home country; one industry to demonstrate oligopoly and another that closely represents perfect competition market structures. Explain your choices

ii) Use the information from your research into these case studies to analyse and demonstrate how well each case study fits that market structure with respect to the key factors already identified in part A

iii) Discuss the potential for price fixing in each case study. Provide any evidence you found that might suggest collusion between the firms in your identified oligopoly industry and discuss any government actions taken to avoid anti-competitive practices

Posted Date: 2/16/2013 4:27:13 AM | Location : United States

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