Q3. Market structures (7 marks)
(a) What conditions allow a monopolistic firm to price discriminate? Give example and illustrate first and third degree price discrimination. (3.5 marks)
(b) In Table-1 below, an oligopolistic firm faces two demand schedules. The current price is $185. Study the table and answer the following questions:
(i) Plot the marginal revenue curve corresponding to the kinked demand curve and explain. (1 mark)
(ii) Given that, Marginal Cost is $150 at every level of output. Copy the table and calculate TR and MR. (1.5 marks= 0.75 each)
(iii) Determine the profit- maximizing level of output and plot on the graph. (1 mark)
Table 1
1 2 3 4 5 6 7
Competitors
Quantity
Demanded Price ($) Total
Revenue
Column 1x2 Competitors follow:
Quantity
Demanded Total
Revenue
Column
(follower) Marginal
Revenue
(MR) Marginal
Cost
(MC)
20 200 4000 35 150
30 195 5850 40 150
40 190 7600 45 150
50 185 9250 50 150
60 180 10,800 55 150
70 175 12,250 60 150
Q4. Market Failure and Externalities (7 marks)
This question covers the market failures and government policy topic presented in Chapter 7 of the prescribed text.
(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? (1 mark)
(ii) What is the socially efficient level of output? (1 mark)
(iii) How much is the marginal external cost at this level of output? (1 mark)
(iv) What size of tax would be necessary for the firm to reduce its output to the socially efficient level? (1 mark)
(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) Population is vaccinated for polio, influenza or swine flu. (1 mark)
(ii) Single use plastic bags litter our environment, rivers and seas. (1 mark)
(iii) Can you think of government policies that might deal with each of the above two external effects of negative externality? (1 mark)
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