Principles of Economics short answer questions

Posted: September 23rd, 2015

(a) Explain with reasons as to why additional advertising (non-price competition) will lead to a smaller and smaller increase in sales of that product.
(b) In the table below an oligopolist firm faces two demand schedules. The current price is given as $185.
Competitors price fixed: Quantity Demanded
Price ($)
Competitors follow: Quantity Demanded
Total Revenue
Marginal Revenue
20
200
35
30
195
40
40
190
45
50
185
50
60
180
55
70
175
60
(i) What would the demand curve be under the kinked demand curve hypothesis? Illustrate and explain.
(ii) Plot the marginal revenue curve corresponding to the kinked demand curve and explain.
calculate TR and MR. Determine the profit- maximising level of output and plot on the graph.
Refer to Chapters 7 & 8
(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). Assume also 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?
(ii) What is the socially efficient level of output?
(iii) How much is the marginal external cost at this level of output?
(iv) What size of tax would be necessary for the firm to reduce its output to the socially efficient level?
(b) Explain and illustrate why the demand for labour curve is downwards sloping?

petition?

Question 3:
Refer to Chapter 9
(a) Explain in terms of the Australian circular flow of income if the following are net injections, net withdrawals or neither? If there is uncertainty, explain your assumptions.
(i) The government purchases US military aircraft.
(ii) The government runs a budget deficit (spends more than it receives in tax revenues) and finances it by borrowing from the general public.
(iii) The government runs a budget deficit and finances it by printing more money.
(b) Give examples and discuss the costs of (i) inflation and (ii) unemployment on the individual, firm, government and the economy as a whole. (2

Question 4:
Refer to Chapter 10
(a) Illustrate and explain what effect will the following have on the expenditure line:
(i) An increase in the proportion of people’s income that is saved.
(ii) A fall in exports.
(b) Using the withdrawals/injections and the income/expenditure approach, show graphically and explain the effects on GDP, consumption and unemployment of a substantial rise in:
(i) Exports
(ii) Government expenditure.