The price system and the microeconomy (A Level) Banker

1. (a) Which condition holds for a firm in long-run equilibrium in perfect competition?A price = marginal cost = minimum average costB price > marginal cost and the firm earns supernormal profitC marginal revenue = marginal cost at an output below minimum average costD price = average variable cost [1]

1. (a) Describe the kinked demand curve model of oligopoly, explaining the assumptions about how rival firms react. [4]
2. (b) Explain why the model predicts that prices in oligopoly will be stable even when costs change. [3]
3. (c) State one limitation of the kinked demand curve model. [1]

1. (a) A monopolist faces the following prices and total costs.A 3 unitsB 4 unitsC 5 unitsD 6 units [1]

1. (a) Explain what is meant by a perfectly contestable market. [3]
2. (b) Explain how the threat of 'hit-and-run' entry affects the behaviour of a firm in such a market. [3]
3. (c) Give one example of a sunk cost that might make the market for domestic air travel less contestable. [1]

1. (a) Evaluate the view that monopoly is always against the interests of consumers. [20]

A rail company sells peak-time and off-peak tickets on one route (invented data). Peak demand is P = 100 − 2Q and off-peak demand is P = 60 − Q, where P is the fare in dollars and Q is thousands of tickets per week. Marginal cost is constant at $20 per ticket in both markets.

1. (a) Calculate the profit-maximising quantity and price in each market. [4]
2. (b) Calculate the price elasticity of demand (as a positive number) in each market at these prices, and explain how this relates to the prices charged. [3]
3. (c) Calculate the firm's total profit from the two markets, ignoring fixed costs. [1]
4. (d) State two conditions that make it possible for the company to practise this price discrimination. [2]

Two airlines, Alpha and Beta, are the only carriers on a route. Each must choose a high fare or a low fare. The table shows annual profits in $ million (Alpha's profit first, Beta's second) (invented data).Alpha high, Beta high: 60, 60Alpha high, Beta low: 20, 80Alpha low, Beta high: 80, 20Alpha low, Beta low: 35, 35

1. (a) Identify each airline's dominant strategy, if it has one. Explain your answer. [3]
2. (b) State the Nash equilibrium and explain why the airlines may be tempted to collude. [3]

1. (a) Evaluate whether price discrimination by firms such as airlines and electricity suppliers benefits consumers. [20]

1. (a) Households that install solar panels reduce air pollution for their neighbours. Assuming no government intervention, what is true of the market for solar panels?A marginal social benefit is less than marginal private benefit, so too many are installedB marginal social benefit exceeds marginal private benefit, so too few are installedC marginal social cost exceeds marginal private cost, so too many are installedD marginal social cost equals marginal social benefit at the market output [1]

A city government is considering a new metro line. Estimated values over its life, in present-value terms ($ million, invented data):private costs (construction and operation): 900private benefits (fare revenue): 600external benefits (time saved by road users, less pollution, fewer accidents): 520external costs (noise and disruption during construction): 80

1. (a) Calculate the net private benefit and the net social benefit of the project. [3]
2. (b) Use your answers to explain why the project would not be built by a private firm but might be undertaken by the government. [3]
3. (c) Explain two difficulties in valuing the external benefits of the project. [4]

In a cement market, the marginal private benefit is MPB = 100 − Q and the marginal private cost is MPC = 20 + Q, where Q is output in thousand tonnes and values are in dollars per tonne. Production causes air pollution with a constant external cost of $20 per tonne. There are no external benefits (invented data).

1. (a) Calculate the free-market output and the socially optimal output. [3]
2. (b) Calculate the deadweight welfare loss caused by the externality. [2]
3. (c) Explain why the free market overproduces cement in this case. [2]

1. (a) Evaluate whether cost-benefit analysis is a reliable method for deciding whether a government should build a large dam for irrigation and electricity. [20]

A consumer has an income of $1200 to spend on two goods, X and Y. The price of X is $40 and the price of Y is $30 (invented data).

1. (a) Calculate the maximum quantity of each good the consumer could buy, and the slope of the budget line (Y on the vertical axis). [3]
2. (b) The price of X falls to $30. Describe how the budget line changes. [2]
3. (c) State the condition for the consumer's optimum choice in terms of indifference curves and the budget line. [1]

1. (a) For a Giffen good, which describes the effects of a rise in its price?A the substitution effect and the income effect both reduce quantity demandedB the substitution effect reduces quantity demanded and the income effect increases it by a larger amountC the substitution effect increases quantity demanded and the income effect reduces itD the substitution effect reduces quantity demanded and the income effect increases it by a smaller amount [1]

1. (a) Evaluate the usefulness of indifference curve analysis in explaining why demand curves usually slope downwards. [20]

1. (a) Using indifference curves and budget lines described in words, explain the income and substitution effects of a fall in the price of an inferior good that is not a Giffen good. [6]
2. (b) Explain how the result would differ for a Giffen good. [2]

A bakery has a fixed number of ovens. The table shows total product (loaves per hour) for different numbers of workers (invented data).Workers: 1, 2, 3, 4, 5, 6Total product: 10, 26, 45, 60, 70, 75

1. (a) Calculate the marginal product and the average product of labour for each number of workers. [3]
2. (b) State after which worker diminishing marginal returns set in, and explain why they occur. [3]

1. (a) What is meant by the minimum efficient scale of production?A the output at which marginal cost is at its lowestB the lowest output at which long-run average cost is minimisedC the output at which a firm first makes normal profitD the highest output a firm can produce before diseconomies of scale stop [1]

A perfectly competitive firm has the following total costs (invented data).Output (units): 0, 1, 2, 3, 4, 5, 6Total cost ($): 120, 180, 220, 252, 300, 370, 462

1. (a) Calculate the average variable cost, average total cost and marginal cost for outputs of 1 to 6 units. [3]
2. (b) State the minimum price the firm needs in order to continue producing in the short run, and in the long run. Explain your answers. [4]

A firm faces the demand curve P = 80 − 2Q, where P is the price in dollars and Q is the quantity per day (invented data).

1. (a) Calculate the output and price at which total revenue is maximised, and the value of total revenue. [3]
2. (b) Calculate the price elasticity of demand (as a positive number) when the price is $60, and explain whether the firm should raise or cut its price from $60 to increase revenue. [3]
3. (c) State the price elasticity of demand at the revenue-maximising output. [1]

1. (a) A consumer buys two goods. Good X costs $2 and its marginal utility is 30 utils. Good Y costs $5 and its marginal utility is 50 utils. To maximise total utility with the same income, the consumer shouldA buy more X and less YB buy more Y and less XC make no changeD buy more of both goods [1]

A consumer has Rs 900 to spend on goods X and Y. The price of X is Rs 100 and the price of Y is Rs 200. The table shows the marginal utility (utils) of each unit (invented data).Unit: 1, 2, 3, 4, 5MU of X: 400, 300, 200, 150, 100MU of Y: 1000, 800, 400, 300, 200

1. (a) Calculate the combination of X and Y that maximises the consumer's total utility, and the total utility at that combination. [4]
2. (b) Explain why the consumer would not choose 5 units of X and 2 units of Y, even though this also costs Rs 900. [2]

1. (a) Evaluate the view that consumers rarely behave in the way that traditional utility theory predicts. [20]

1. (a) Explain how the principle of diminishing marginal utility can be used to derive a downward-sloping demand curve for an individual consumer. [4]
2. (b) Explain two limitations of the assumption that consumers behave rationally when making choices. [4]

1. (a) Define allocative efficiency and productive efficiency, stating the condition for each. [4]
2. (b) Explain what is meant by dynamic efficiency. [2]
3. (c) Explain what is meant by Pareto optimality. [2]

1. (a) A firm sells its output at a price of $12. At its current output, its marginal cost is $9 and its average cost is $10. What can be concluded?A the firm is allocatively efficientB the firm is producing less than the allocatively efficient outputC the firm is producing more than the allocatively efficient outputD the firm is making a loss [1]

Invented data: a pharmaceutical company spent $1.2 billion over 12 years developing a new medicine. Only about 1 in 10 medicines that reach clinical trials are eventually approved. The new medicine is protected by a 20-year patent. Its marginal cost of production is about $30 per course of treatment, but it is sold for $900 per course.

1. (a) Explain why a 20-year patent may reduce allocative efficiency. [4]
2. (b) With reference to the data, evaluate whether patents increase economic efficiency overall. [8]

1. (a) Explain the principal-agent problem that can arise from the divorce of ownership and control in large public limited companies. [4]
2. (b) Explain two ways in which shareholders might reduce this problem. [4]
3. (c) Explain what is meant by 'satisficing'. [2]

A firm faces the demand curve P = 120 − 2Q and has total cost TC = 400 + 20Q, where P is in dollars and Q in units per week. Total cost includes normal profit (invented data).

1. (a) Calculate the output, price and profit if the firm maximises profit. [3]
2. (b) Calculate the output, price and profit if the firm maximises total revenue. [3]
3. (c) Calculate the largest output the firm can sell while still earning at least normal profit (sales maximisation). Give your answer to 1 decimal place. [2]

1. (a) Evaluate whether the vertical integration of firms is likely to benefit consumers. [20]