Level 3 Economics, 2005

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1 For Supervisor s Level 3 Economics, Understand marginal analysis and the behaviour of firms Credits: Five 2.00 pm Thursday 17 November 2005 Check that the National Student Number (NSN) on your admission slip is the same as the number at the top of this page. You should answer ALL the questions in this booklet. If you need more space for any answer, use the page(s) provided at the back of this booklet and clearly number the question. Check that this booklet has pages 2 8 in the correct order and that none of these pages is blank. YOU MUST HAND THIS BOOKLET TO THE SUPERVISOR AT THE END OF THE EXAMINATION. For Achievement Use marginal analysis to derive the demand and supply curves and to describe the behaviour of firms in different market situations. Achievement Criteria Achievement with Merit Use marginal analysis to explain changes in output and pricing decisions. Overall Level of Performance Achievement with Excellence Comprehensively apply marginal analysis. New Zealand Qualifications Authority, 2005 All rights reserved. No part of this publication may be reproduced by any means without the prior permission of the New Zealand Qualifications Authority.

2 2 You are advised to spend 45 minutes answering the questions in this booklet. QUESTION ONE (a) For each question in the grid below, place the correct letter in the appropriate column. The first one has been done for you as an example. Features of Market Structure Number of Sellers: A Two sellers B A few sellers C One seller D Many sellers Perfect Competition Market Structures Monopolistic Competition Oligopoly Monopoly D D B C (i) Nature of product: A Homogenous B Differentiated C No Substitute (ii) Control over price: A Strong B Weak C None Identify a New Zealand business operating in each market structure below: (i) (ii) Duopoly: Monopsony: (c) Identify an example of product differentiation being used in the Econ Air advertisement shown here. (d) Describe how the product differentiation you identified in (c) above could increase Econ Air s sales. Special Offer 20% off normal prices TODAY ONLY Call in today or book on-line

3 3 QUESTION TWO (a) Complete TABLE 1 below by filling in the missing numbers. TABLE 1 Angela Agassi s Utility Schedule for Tennis Balls Quantity Consumed (packs of three) Total utility ($) Marginal utility ($) Use your completed TABLE 1 to plot Angela Agassi s demand curve for tennis balls on the graph below. Title: Price ($) Quantity (packs of three) (c) Use marginal utility to explain why Angela purchases more tennis balls when the price of tennis balls falls.

4 (d) (e) Give THREE possible reasons why Angela Agassi would increase her demand for tennis balls. (1) (2) (3) Describe why an unacceptable answer for (d) above is because the price of tennis balls decreased. 4 QUESTION THREE (a) Using GRAPH 1, complete the supply schedule next to it. GRAPH 1 Costs / Revenues $ MC AC AVC SUPPLY SCHEDULE Price ($) Quantity D Quantity

5 5 Define the Law of Diminishing Returns. (c) (i) Complete TABLE 2 below by calculating the missing numbers. Note: Tennis racket factory workers are paid $10 per hour. TABLE 2 Productivity of Workers at a Tennis Racket Producing Firm Total Output (number of tennis rackets) Total hours worked Hours required to increase output by one unit Marginal cost of producing extra units 1 10 $ $ (ii) At which output level in TABLE 2 do diminishing returns begin? (iii) Use TABLE 2 to help you explain why diminishing returns cause the marginal cost of tennis racket production to increase.

6 6 QUESTION FOUR GRAPH 2 Perfectly Competitive Firm GRAPH 3 Perfectly Competitive Market Costs / Revenues $ MC Price $ S AC D Quantity Quantity (a) On GRAPH 2: (i) Add an appropriately positioned average revenue curve. Label your curve AR. (ii) Label the profit maximising price (P PM ) and quantity (Q PM Explain why the market supply will increase in the long run. (c) On GRAPH 3: (i) Draw the long-run supply curve (label it S 1 (ii) Label the long-run price (P 1 ) and quantity (Q 1 (d) On GRAPH 2: (i) Draw the long-run average revenue curve (label it AR 1 (ii) Label the long-run price (P LR ) and quantity (Q LR

7 7 QUESTION FIVE Costs / Revenues $ GRAPH 4 Monopoly Firm MC MR AR Quantity (a) On GRAPH 4: (i) (ii) Label the profit maximising price (P) and quantity (Q Add an appropriately positioned average cost curve (AC) showing the monopoly firm earning normal profit. Justify your positioning of the average cost curve. (c) (d) If GRAPH 4 showed a perfectly competitive market, identify on GRAPH 4 the market price (P PC ) and market quantity (Q PC ) that would occur. Use marginal analysis to explain why a monopolist would not willingly operate at the perfectly competitive market output level.

8 8 Extra paper for continuation of answers if required. Clearly number the question. Question number

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