Level 3 Economics, 2011

Transcription

1 SUPERVISOR S Level 3 Economics, Understand marginal analysis and the behaviour of firms 2.00 pm hursday Thursday 1 November 2011 Credits: Five 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 attempt ALL the questions in this booklet. If you need more room for any answer, use the extra space provided at the back of this booklet. Check that this booklet has pages 2 11 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. Achievement Criteria Achievement Achievement with Merit Achievement with Excellence Describe the behaviour of firms and the different markets in which they operate. Recognise marginal concepts that relate to supply and demand. Use marginal analysis to recognise equilibrium for the perfectly competitive firm or the monopolist. Describe the behaviour of firms and the different markets in which they operate. Use marginal analysis to derive the supply or demand curve. Use marginal analysis to explain equilibrium for the perfectly competitive firm or the monopolist in different markets. Describe the behaviour of firms and the different markets in which they operate. Use marginal analysis to derive supply or demand curves. Use marginal analysis to fully explain changes in output and pricing decisions for the perfectly competitive firm or the monopolist in different markets. Overall level of performance (all criteria within a column are met) New Zealand Qualifications Authority, 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 The market for groceries in New Zealand is dominated by two competitors, Foodstuffs and Progressive Enterprises Limited. Apart from these two dominant competitors, there are also competitors like dairies and petrol stations, which have a very small market share, that also sell grocery items. (a) State the type of market structure that the New Zealand groceries market is most likely to represent. (b) Apart from the number of competitors, describe TWO other features of this type of market structure. (c) Many dairies sell a similar range of food items. Apart from selling different food items, describe TWO other ways in which a dairy can differentiate its products or services. (d) Tauranga has more than 20 dairies. State the type of market structure in which dairies are most likely to operate.

3 3 QUESTION TWO Toni tried her first bungy jump during her holiday, and she would now like to do more jumps. Freefall Bungy, where Toni did her jump, had a sign that said, Bungy jumps $100. Take another jump within seven days and pay only $60 for your second jump. (a) Use the law of diminishing marginal utility and the optimum purchase rule to explain why customers may not be prepared to pay the same price for their second bungy jump. Toni paid $100 for her bungy jump and received $150 worth of marginal utility from it. Instead of a bungy jump, she could have chosen to do a sky dive. The price of a sky dive is $200. (b) Given that Toni chose to do a bungy jump instead of a sky dive, use the consumer equilibrium formula ( MU a P a have been less than $300. = MU b P b ) to explain why her marginal utility for a sky dive would

4 (c) Complete Table One below, calculating the missing total utility and marginal utility figures. 4 Table One: Toni s Utility Schedule for Bungy Jumps Number of jumps Total Utility (TU) $ Marginal Utility (MU) $ (d) Use the figures in Table One (above) to complete Table Two below. Table Two: Toni s Annual Demand Schedule for Bungy Jumps Price ($) $40 $80 $120 $160 Quantity demanded (e) (i) Toni did her bungy jump with Freefall Bungy. Complete Table Three below by calculating the missing values. (Round all your figures to the nearest dollar.) Output / day (Bungy jumps) Table Three: Costs of Production for Freefall Bungy Total cost ($) Total variable cost ($) Average variable cost ($) Average cost ($) Marginal cost ($)

5 (ii) Using the information in Table Three, calculate the total fixed cost for Freefall Bungy. 5 Answer: (f) Using the information in Table Three, complete Graph One below. Graph One: Freefall Bungy s Supply Curve for Bungy Jumps Price ($) Quantity The owners of Freefall Bungy will use all of their savings of $ to expand their business. The owners currently earn 5% p.a. in interest on their savings. They will set up a new bungyjump operation in a different location. They estimate that the revenue from the new venture will be $ and they will need to spend $ in setting up and operating the new venture. (g) Using the information above, explain the difference between the accounting cost and the economic cost of the new bungy-jump operation.

6 6 QUESTION THREE Dairy farmers are said to operate in a perfect competitive market. (a) If a dairy farmer is in perfect competition with all other dairy farmers, explain what will happen to the farmer s average revenue and marginal revenue if the farm increases its output (quantity of milk produced). Graph Two: An Individual Dairy Farmer Graph Three: The Market for Milk Revenue / Cost ($) MC AC Price ($) P S D Quantity Quantity (b) On Graph Two above: (i) Add an appropriately placed average revenue curve (AR) and marginal revenue curve (MR). (ii) Identify the profit-maximising price (P e ) and profit-maximising quantity (Q e ). (iii) Shade in the area of profit made by the dairy farmer, and clearly label the type of profit being made. (c) Use marginal analysis to explain why the dairy farm maximises its profit at Q e on Graph Two.

7 7 (d) Use marginal analysis to fully explain the changes that will occur in the long run to the price AND output in Graphs Two and Three. In your full explanation: Make appropriate changes to Graph Two AND Graph Three. Clearly label the changes made to both graphs. Refer to the changes that you made to the graphs in your explanation.

8 8 QUESTION FOUR Fonterra is New Zealand s largest business, and is said to have the monopoly over the market for milk products. Fonterra announced an after-tax profit of $685 million for the year ended 31 July Source (adapted): +Release+FONTERRA+ANNOUNCES PAYOUT+OF+$6.70+BEFORE+RETENTIONS.pdf?MOD=AJPERE S&CACHEID=b90f bb27946cdeb7b0c23ace Graph Four: A Monopolist Firm Revenue / Cost ($) MC MR Quantity (a) (b) On Graph Four above: (i) Draw and label an appropriately placed average revenue (AR) curve for a monopolist firm. (ii) Draw and label an appropriately placed average cost (AC) curve, to show the monopolist firm making a supernormal profit. (iii) Identify and label the profit-maximising price (P e ) and profit-maximising quantity (Q e ). (iv) Shade in the area of supernormal profit. Use marginal analysis to explain why the monopolist will need to set the price at P e to maximise profits in Graph Four.

9 9 (c) Explain what type of profit the monopoly firm in Graph Four is likely to make in the long run. (d) Use marginal analysis to fully explain what effect an increase in demand for milk products is likely to have on Fonterra s output and pricing decisions. You do not have to show your changes on Graph Four. Include in your full explanation: the effect on average revenue (AR) and marginal revenue (MR) of an increase in demand for milk products what decisions Fonterra is likely to make regarding its level of output and the price it charges for milk products the use of marginal analysis to explain Fonterra s output and pricing decisions.

10 10 QUESTION NUMBER Extra space if required. Write the question number(s) if applicable.

11 11 QUESTION NUMBER Extra space if required. Write the question number(s) if applicable.

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