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You are expected to:
Explaint that profit maximizing output is where MC = MR and if , at this output, AC is greater than AR, the firm will make a loss in the short run.
Illustrate this point using the standard perfect competition diagram.
Label the diagram and explain it properly
You are expected to
Define
average total cost (ATC)
Explain the concept of diminishing returns
Draw diagram showing marginal cost (MC) and average total cost (ATC). Label it properly and explain it
Explain MC cuts ATC at lowest point
Explain the impact of marginal cost (MC) changes on average total cost (ATC)
Expalin that MP cuts AP at highest point.
You are expected to
Start with definitions of allocative and productive efficiency
Explain perfect competition
Explain that a firm in perfect competition in long-run is allocatively and productively efficient
Support your answer with correctly drawn and labelled diagram
Explain monopoly
The firm in monopoly in long-run is neither allocatively nor productively efficient
Support your answer with correctly drawn and labelled diagram
However there is higher output and lower prices in monopoly than in perfect competition due to economies of scale
You are expected to
Define allocative and productive efficiency.
Draw the standard perfect competition equilibrium diagram showing and explaining that in perfect competition output will occur on the lowest point of the ATC curve (productive efficiency), and that price will be equal to MC (allocative efficiency).
Label your diagram properly and explain it.
You are expected to
Define monopoly
Explain that a monpolist strives to proudce at the revenue maximizing level of output (MR = 0) and the profit maximizing level of output (MC = MR)
Support your answer with an accurately labelled diagram showing the levels of price and output when profit is maximized and when revenue is maximized.
Explain the fact that when the change from revenue maximization to profit maximization is made, output will fall and price will rise.
You are expected to
Define short run and long run
Explain the concepts of
Draw a properly labelled diagram of product curves and/or short run cost curve showing law of diminishing returns
Support your answer with a diagram illustrating economies of scale using long run cost curves
Explain the linkage between the two concepts
You are expect to
Explain the concept of profit maximization (MC=MR) with the help of properly labelled diagram
Explain that many firms may have profit maximization as a goal.
Explain the concept of Sales revenue maximization (MR=0), or where TR is at its maximum
Explain that sales revenue maximization may be a goal of the firm.
You are expected to
Define monopoly
Distinguish between revenue and profit
Draw a diagram should show profit maximizing level of output (MC = MR)
Draw a diagram should show revenue maximizing level of output (MR = 0)
These diagrams should include AR(D), MR and MC curve
Support your diagram with an explanation that when there is a move from profit maximization to revenue maximization, output will increase and the price of the good will fall.
You are expected to
Explain the characteristics of monopolistic competition
Support with an example of monopolistic competition, e.g. food, clothing, restaurants
Draw a diagram illustrating a short-run profit maximizing position, e.g. abnormal profits or losses
Explain your diagram.
Draw a diagram illustrating the long-run profit maximizing position, i.e. normal profits
Explain long-run profit maximizing position and how it differs from the short-run profit maximizing position.
Define price discrimination
Explain that an airline would want to practice price discrimination in order
to earn higher revenues and earn greater economic (supernormal) profits through the capture of consumer surplus
to drive higher cost competitors out of the market by lowering prices for some consumer groups, and therefore it can increase its monopoly power
You answer should also include an explanation about how an airline can practice price discrimination:
It may do so by spliting the market and discriminate between different buyers: they can charge the elderly lower prices on certain days, give discounts for students' weekend travel, offer lower fares to travellers who make advance bookings and charge higher fares to those making their travel plans closer to the day of travel