ECO402 Final Term Questions and Answers Preparation

ECO402-MICRO ECONOMICS Lecture Wise Questions and Answers

For Final Term Exam Preparation by Virtualians Social Network

Topic: Perfectly Competitive Markets

Define a competitive firm breaking even?

Firm is producing an output Q2, where MC = MR at price (P2) Its total cost (AC * Q ) equals its total revenue (P*Q) In this case the firm breaks even (or makes normal profit).

What is a competitive firm incurring losses?

At price P2 = $30 per unit the firm cannot avoid incurring losses, because that price is below the minimum average cost represented by P3 = $40. At the profit maximizing output q* the price P2 is less than an average cost, so that line segment AB measures the average loss form production where P= MC, which represent, AC - P (profit/loss per unit). The firm could minimize it's losses by producing at q*, with losses ABCD being incurred, however if the firm were to shut down, it would incur even greater losses equal to the fixed costs of production CBFE.

What is Marginal revenue

Marginal revenue is the change in total revenue that firm gets by selling one more unit of output. For example, a firm gets total revenue of Rs. 1000 by selling 10 units of output. This firm gets total revenue equals to Rs. 1200 by selling 11 units of output. The marginal revenue in this case is Rs. 200 which is the additional amount that firm gets by selling additional unit of output.

Topic: The Short-Run Market Supply Curve

What is short run market supply curve?

The short run market supply curve

Amount of output that the industry will produce for every possible price in short run shows short run market supply curve. The industry’s output is the sum of the quantities supplied by all of its individual firms. By adding the supply curves of each firm we can get market supply curve. Suppose there are three firms and each firm have different production costs. Supply curve of each firm will be the portion of marginal cost which lies above the average variable cost. Among these three firms, a firm which has low average variable cost and market price is above it, will supply more units as compared to other firms that have high average variable cost.

Define the concept of perfectly elastic and inelastic for short run supply?

If supply of a good is relatively more elastic, it means its production responds/changes quickly due to change in its price in the short run. For example supply of burgers (fast food) is relatively more elastic in the short run. Some goods have relatively more inelastic supply curve in the short run. For example supply of housing is more inelastic. Its supply does not response quickly even though a large change in price has been occurred.

what is the difference between the accounting profit and economics profit?

Accounting profit = Total revenue - Explicit Cost Economic Profit = Total revenue - (Explicit cost + Implicit cost).

Topic: Equilibrium In Perfectly Competitive Markets

Q. How can we measure the degree of economics of scope, Kindly explain with the help of Formula?

Economies of scope mean output produced jointly by a single firm is greater than output that could be produced by two different firms, when each produces a single product. For example, KFC can produce both Chicken burger and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because KFC’s Chicken burgers and French fries share the use of food storage and preparation facilities. Economies of scope can also be found by studying a firm’s costs. If a combination of inputs used by one firm produces more output than two different firms would produce, then the costs for the firm producing jointly will be less than the costs of the firms producing separately. We can measure the degree of economies by following formula: