It can be inferred that over the output range the farm is operating under conditions of
C. perfect competition and rising marginal costs
Marginal revenue is the revenue gained from producing one additional unit of output. In this case the revenue gained from each additional unit of output is £100. Marginal cost is the additional cost of producing one additional unit of output. In this case the marginal cost rises by £20 with each unit of output. So at 1 unit of output MC = 20, MR = 100. at 5 units of output MC = 120 MR = 100. As MR is constant the firm is in perfect competition - with rising marginal costs.
3. In September 2007, the Office of Fair Trading (OFT) launched an investigation into claims that major supermarkets agreed among themselves to raise the price of milk to consumers by 3 pence per pint. The investigation was undertaken because
A. the competition regulations may have been breached
The OFT and the competition commission are agencies set up by the UK government to regulate firms who are behaving anti competitively. Anti-competitive behaviour includes collusion. If firms agree together to raise prices this is collusive behaviour and the firms are behaving like a monopoly instead of an oligopoly. This reduces consumer surplus and consumer choice as well as eliminates competition. If this is the case, the collusion is likely to be covert (secret). E is wrong because collusion reduces not increases consumer surplus.
4. The diagram shows different possible price and output combinations for a firm. Which of the following is true?
B. supernormal profits are achieved if the firm sets an allocatively efficient pricing policy.
Allocative efficiency is achieved when price is equal to marginal cost (p4,q4). At this point, costs are lower than price therefore supernormal profits are made (profits made over and above normal profit). Costs in this diagram would be set where hte quantity line for Q4 hits the ATC curve. A is wrong because the profit maximising position is q1, and the revenue maximising position is q2 - a higher level of output than q1.
5. UK consumers were charged £269 and US consumers the equivalent of £200 for the Apple iPhone in October 2007. The most likely reason why Apple was able to charge different prices is because:
C. different PED exist for the iphone between the UK and the US market.
Charging different prices to different consumer based on their price elasticity of demand is called price discrimination. Price discrimination can only take place if markets are separable, consumers in each market have different PEDs and there is no seepage (reselling of the product between markets). In this case the markets are separable by country. Consumers in the UK may have a lower elasticity of demand because there are a narrower range of phones available in the UK than in the US or for many other reasons. D is wrong because if there was significant leakage between the two markets, price discrimination could not take place.
6. Figure 1 shows the price of gas and Figure 2 shows the percentage of households switching
gas suppliers in selected countries. Which of the following can be inferred from the data?
E. the british gas market is more competitive than the German and Italian gas markets
Competitiveness is when firms are using pricing and non pricing policies to attract customers to their firm over another firm. The UK gas market is clearly more competitive than the German and Gtalian gas markets because 47% of consumers were switching gas suppliers in 2005 as opposed to 5% in Germany and 1% in Italy suggesting that firms are behaving competitively. Also Britain had the lowest household price of gas in 2005 (3 pence/kwh) suggesting that competition has been pushing down prices as opposed to Italy where the price was 5 pence/kwh.
7. In 2007, the European Competition Commission instructed Microsoft, the computer software giant, to make freely available some of its patented technical information to rival companies such as Sun Microsystems. The most likely effect on the computer software market of this decision is to
B. increase contestability
A contestable market is one in which there are no sunk costs and no barriers to entry. A legal patent is an example of a barrier to entry for firms attempting to enter the computer software market, so by removing it the competition commission is making the market more contestable. E is wrong because by lowering barriers to entry it is easier for new firms to compete away microsofts supernormal profits and therefore their profits will fall.
8. A loss-making motor vehicle manufacturing firm is most likely to continue in production in the short run if:
E. average revenue exceeds average variable costs
A firm making a loss in the short run should continue production if it is covering its variable costs and making a contribution to its fixed costs. It does this because, by continuing to produce, it may minimise its losses or even reach normal profit again in the long run. If price is equal to average variable cost this is known as shut down point, and the firm should stop production. (i can't find a good diagram to insert here, but i would draw a firm with price below ATC and above AVC.)
9. In 2007, Sony launched the PlayStation 3 games console in Britain at a price of £425. This exceeded the launch price of its major competitors, Microsoft’s Xbox 360 at £265 and Nintendo’s Wii at £180. The most likely explanation for these price differences is that
E. Significant product differentiation between the game consoles.
The games console market is highly diverse and games consoles tend to be completely different. All three require different consoles and games which work on one will not work on another. There is a lot of brand loyalty in the industry and if people like the games console that they are used to they are unlikely to switch. Also if a person previously owned a PS2 (to which the PS3 is an upgrade) they already own games which only work on the play station console - so in fact for them it would be a waste of previously spent money to buy a new console. A is wrong because if there was a higher elasticity of demand for PS3 a high price would make consumers less likely to buy their products.
10. Nail bars operate in a monopolistically competitive market. Which of the following will be true for such a firm in long-run equilibrium?
A. not allocatively efficient, low barriers to entry and exit, differentiated products
A market in monopolistic competition is one with many buyers and sellers and low barriers to entry and exit like perfect competition, but unlike perfect competition there is some differentiation between the products on sale, e.g. branding. The firms are not allocatively efficient because they are assumed to be aiming to profit maximise (see diagram MC=MR) and at this position the price is higher and the revenue is lower than if the firm were allocatively efficient. (Price = MC).
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