Business Microeconomics (Other (Not Listed) Sample)

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Business Microeconomics
1 Marginal cost curve
The marginal cost curve is U-shaped depicting the relationship between output and the marginal cost. When the quantity of output is small, the marginal cost is comparatively high. However, when the production up surges the marginal cost plummets reaching a minimal value and then increases again.
Average total cost curve, Average variable cost curve, Average fixed curve.
lefttopATC- Average Total Coat
AVC- Average Variable Cost
AFC-Average Fixed Cost
As seen from the graph above, the average total cost first declines because the fixed costs are spread over a huge number of units. Gradually, it goes up as the marginal cost increases owing to the law of diminishing returns. AVC initially goes down too, but it is not as steep in comparison to the marginal cost. Then it starts to rise up but not with the speed of the marginal cost curve. On the other hand, the AFC remain constant. For this reason, the higher the production the lower the fixed costs, thus AFC continually declinesCITATION Irv11 \p 82 \l 1033 (Tucker 82).
b) The marginal cost curve intersects the average cost curve at its minimum, because when the average cost curve is declining, the marginal cost is usually lower than the average cost. On the other hand, when the average cost is rising, the marginal cost will be higher than the average cost. ATC has to up as MC rises because every unit produced increases ATC. In addition, as production increases, MC increases but ATC declines. Eventually ATC and MC will intersect and as MC rises it pulls ATC with itCITATION Irv11 \p 84 \l 1033 (Tucker 84).
c) The AVC minimum point occurs at a lower level of output in comparison to the AC minimum point because the AC integrates the AFC. As AVC continues to rise, AFC continually declines. For this reason, it takes a prolonged period for the rising AVC to overcome the declining AFC, therefore causes the ATC curve to riseCITATION Irv11 \p 87 \l 1033 (Tucker 87).
2a) Price inelasticity means that when there is a change in price the demand of the products will not be influenced or determined by this change. The change in price can be significantly huge but in response the change in demand is small. Medicine have a price inelastic demand because they are products buyers cannot do without. No one buys medicine for leisure, it is bought when there is need. For this reason, regardless if the price is high or low, a patient must buy medicine. The small change in demand may arise when price is increased, which is mostly caused by those who can use herbs or other substances as substitutes for medicines.CITATION Rog13 \p 234 \l 1033 (Arnold 234)
2b)
As depicted from the graph, the demand curve for an inelastic product is a vertical line slightly tilted. This is because a large change in price causes a small change in the quantity demanded. For instance, in the graph the price increase is massive but the quantity demanded decreased with a low range.
c) From the diagram, the upward change in price depicts profits while the decrease in quantity demanded depicts loss. Since pharmaceutical companies have a price inelastic demand, it means their prices are high as well as their profits and the returns in form of revenue.
3a) the perfect competitive market is characterized by freedom of entry and exit, firms are price takers, products are homogenous, the firms have a small market share and the buyers are aware of the products as well as the prices charged by the firms. The features does not exist precisely in the industries, therefore the market structure does not exist in the real worldCITATION Lib10 \p 12 \l 1033 (Libby and Timothy 12).
3b)
In the short run, at equilibrium normal profits are realised where SMC=MR=AR=SAC. However, some industries earn supernormal profits and others incur losses.
In the long run, all firms earn normal profits. There is no reason for new entry or exit of firmsCITATION Lib10 \p 34 \l 1033 (Libby and Timothy 34).
3c)
In the short run, a monopolist will operate at MC=MR. They produce a quantity for which the marginal benefits are maximized thus making super-normal profit. As new entrants fill the market in the long run, the super normal profits erode away.
In the long run, monopolists produce at MC=MR=P=ATC. This becomes a barrier to entry for other new firms since the economic profit is reduced to zero CITATION Wil15 \l 1033 (William).
3d) in perfect competitive markets, price is equal to the marginal cost. This depicts efficiency as resources are allocated efficiently. This means that there cannot be production of more or less of a product so as to achieve extra satisfaction from resources CITATION Rnd14 \l 1033 (Amos).
4) False. Monopolist will charge a price whereby MR=MC. When MR=MC, it means their price is higher as compared to that of perfect competitive firms if they had the same costs. In addition, monopolists must obey the law of demand. Therefore, if the prices are high the quantity demanded is low. For this reason, if the prices are too high, their revenue reduces and their profits will not be maximized. As shown in the figure below for monopolists at equilibriu...