Friday, August 19, 2016

2016 Microeconomics FRQ #3

You should have been able to recognise that the business above is in a monopolistically competitive market - differentiated products, no barriers to entry.

(A) Draw a CLG showing Camden's demand curve, marginal revenue curve, marginal cost curve, and long-run average total cost curve. Label Camden's profit maximising output Qm & Pm.

(B) On your graph in part (a) label the output at which total revenue is maximised QR.

Max revenue is where MR = 0, at that quantity revenue is maximised.

(C) Do firms in this market experience economies of scale, diseconomies of scale, or neither in long-run equilibrium? Explain.

College Board! "YOU SICK BASTARD"!
Refer back to the EOS - Economies of Scale post

Notice that where MR=MC intersect and we find our price and quantity the LRATC curve is sloping downward. This is the section of the LRATC (long run average total cost curve) where resource prices are decreasing in the industry. It's a decreasing cost industry or an increasing returns industry or this industry is experiencing economies of scale.