Monday, November 21, 2016

2009 B Microeconomics FRQ #1

2009 B Microeconomics FRQ #1

(A) Draw a CLG for Mary & Company and show each of the following.

(i) The profit max output and price, labelled as Qm & Pm respectively.

(ii) The area of loss shaded completely.

(B) What must be true in the short run for the company to continue at a loss?

Memorise this phrase, " In order for a company to continue operation at a loss it must be covering its variable costs (labor). You will see this again.

(C) Assume now that the demand for cleaning products increases and that the company is not earning short-run economic profits. relative to this short-run situation, how does each of the following change in the long-run.

(i) The number of firms.

Increase - In the long-run more firms will enter the market as profits attract firms.

(ii) The company's profit.

Decrease - In the long run the firm will be in long-run equilibrium making zero economic profit.

(D) In the long-run if the company continues to produce, will it produce the allocatively efficient level of output? Explain.

Remember that the industry is a monopolistically competitive industry, 
In the long-run the allocatively efficient level of output will not be produced. 

Monopolistic Competition Cheat Sheet is here.

(E) In  the long-run will the company be operating in the region where 
economies of scales (EOS) exist.
Absolutely - 
First, You must know what economies of scales looks like. Economies of Scale is the left half of the LRATC curve. It means that even though quantity in the industry is increasing costs for those resources are falling. 

EOS post is here.

Now, look closely at the graph you were to have drawn and notice 

Even when the firm is in long-run equilibrium it will still be operating in the downward sloping section of the ATC and therefore in the EOS region.