Sample questions Sep 2016 (Part B)

QUESTION 1

a) Industry demand for a good is given by: P = 60 - 0.5Q. The industrys long-run
cost is $10 per unit: LAC = LMC = $10

i)

A monopolist controls the industry. Find its output and price.

(5

marks)

ii)

Instead, suppose that the same industry is perfectly competitive.

Find the long-run equilibrium price and output.
(5 marks)

iii)

Comment on the differences between the monopoly and perfectly

competitive results in part a (i) and (ii).
marks)

Suggested answers

a)
i) Reference: L10/ Monopoly

Marks allocation: 4 marks for answers +1 marks workings = 5m

Suggested Answers

Monopolists output and price

o QM = 50 units
1

(2

PM = $35

ii) Reference: L9/ Competitive Markets

Marks allocation: 4 marks for answers +1 marks workings = 5m

Suggested Answers

Perfectly competitive output and price

o QP = 100 units
o PP = $10

iii) Reference: L9/ Competitive Markets

Marks allocation: 1 marks for answers +1 marks explanations = 2m

Suggested Answers

Perfectly competitive output and prices are higher and lower respectively
because of efficiency while the monopoly is inefficient.

QUESTION 2

a A monopoly has carefully estimated industry demand. Its revenue projections for
different levels of sales are listed in the following table. In addition, it estimates
its total cost to be:
C = 20 + Q + Q2

Output

Revenue

90

160

210

240

250

240

210

160

90

10

Total Cost

Profit

Complete the table and determine the profit-maximizing level of

output.
(6 marks)

ii

Based on answer to part a (i), what would happen to the firm in the
long run? Illustrate your answer using appropriate diagrams.
(4 marks)

b Dr. Leona, a well-known plastic surgeon, with a reputation of being one of the
best surgeon in the region, enjoys a substantial degree of market power and has
3

fixed costs per month at $8000. She has estimated her demand curve and
average variable cost function per month to be as follow:
Q = 480 0.2P
AVC = 2Q2 15Q +400

i)

If the doctor wishes to maximize her profits, how many nose

operation should she perform each month and at what price? How
much profit does she earns in each month?

(6 marks)
ii)

Explain possible reasons why she can enjoy such high economic
profits.
(4 marks)

Suggested answers
a)
i) Reference: L10/ Monopoly
Marks allocation: 6 marks for answers = 6m

Suggested Answers
As indicated in the table, the optimal output is Q = 4 or Q = 5.

Output

Revenue

Total Cost

Profit

90

22

68

160

26

134

210

32

178

240

40

200

250

50

200

240

62

178

210

76

134

160

92

68

90

110

-20

10

130

-130

ii) Reference: L10/ Monopoly

Marks allocation: 3 marks for diagram +1 marks explanations = 4m

Suggested Answers

b)
i) Reference: L10/ Monopoly

Marks allocation: 2 + 1+1+1+1 marks= 6m

Suggested Answers

Monopolists output and price

o QM = 20 units (-16 as negative to be ignored after solving)
o PM = $2300 {2400 5(20)}
o TR = 2300 x 20 +$46,000
o TC = $26,000
o Profit = $20,000
ii) Reference: L10/ Monopoly
Marks allocation: 2 x2 marks= 4m

Suggested Answers

Economies of scale
Monopoly power
Government regulation and licensing etc.