1 . I'IHITIIBIFI UNIVERSITY OF SCIENCE FII'ID TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: Z3BECO LEVEL: 6 COURSE CODE: IEC31ZS COURSE NAME: INDUSTRIAL ECONOMICS SESSION: NOVEMBER 2017 PAPER: THEORY DURATION: 3 HOURS MARKS: 100 FIRST OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINER(S) Dr David Uchezuba MODERATOR: Mr Eden Shipanga INSTRUCTIONS PWNI This question paper is made up of four (4) questions. Answer ALL the questions and in blue or black ink. Start each question on a new page in your answer booklet. Questions relating to this examination may be raised in the initial 30 minutes after the start of the paper. THIS QUESTION PAPER CONSISTS OF 7 PAGES (excluding this front page)
2 Questionl 1.1. Distinguish amongst the following market structures a). b). b). Competitive market Monopoly Monopolistic competition Oligopoly (8 marks) 1.2 What does it mean if we describe all participants in a perfectly competitive market as price takers? (2 marks) 1.3. Distinguish between A firm and an industry (2 marks) 1.4. What are the characteristics features of the following types organisations? of business Sole proprietor General partnership Limited partnership Corporation (8 marks)
3 1.5 Indicate whether each of the following statements about the features of a perfectly competitive market is True or False: In a perfectly competitive market, there are large number of buyers and sellers Each firm sets the price of its product independently from other firms supplying the same product. Goods sold in a perfectly competitive market by different sellers must be homogenous. If there are barriers to entry and exit, perfect competition cannot exit. No buyer or seller has perfect knowledge of the market condition. Perfect competition is characterized by high degree of government intervention. Perfect competition represents a standard against which the functioning of all other markets can be compared. Perfect competition is the most acceptable form of market competition. The agricultural sector more or less complies with the requirements of a perfect competitive market. Perfect competition represents a clear and meaningful starting point for analysing the determination of price and output.
4 with Question Which of the following is True or False about the demand for the product of a firm. A seller in a perfectly competitive market faces perfectly elastic demand curve for his product. Under perfect competitive market, the market price is also determined by demand and supply Under perfect competition, the market price also represents the marginal revenue and average revenue of each firm. In a perfectly competitive market, a firm can sell more of its product by raising the price. Under perfect competition, each individual firm faces a vertical demand curve for its product. Monopoly and monopolistic competition are two different market structures Monopolistic competitive firms produce differentiated products Each firm in a monopolistic competition has a horizontal demand curve for its product Each firm in a monopolistic competition has a specific demand curve for its products a downward slope A monopolistic competitive market has many sellers selling homogenous product.
5 2.2. A firm produces a product which it sells in a perfectly competitive market. The price of the product is N560 per unit and the firm s cost structure is given in table 1 below Table 1 Firm s cost structure Units Total fixed Total Total cost Average total Marginal cost produced (Q) cost (NS) variable cost (N$) cost (NS) (N$) (N$) a. Complete the table 1 b. Compute how many units the firm should produce and sell to maximize profit. (10 marks) 2.3. indicate whether the following is true or false. a. A firm is in equilibrium if it maximizes it profit. b. When a firm decides not to produce any output (at shut down), its loss is equal to the total fixed cost. c. The equilibrium position of a firm is also its profit maximizing position d. If a perfectly competitive firm is producing when marginal revenue equals marginal cost, it can increase its profit by increasing its output and optimum price
6 A firm s economic profit per unit of output is given by the difference between marginal revenue and marginal cost. If a firm s average revenue is greater than its average cost, it is earning profit. an economic If a perfectly competitive firm is earning a normal profit only, its average cost, marginal cost, average revenue and marginal revenue are equal at the equilibrium quantity as well as equal to the market price. In the short run, a perfectly competitive firm can only earn normal profit Suppose a perfectly competitive firm 5 currently producing an output level where price is NSS, average variable cost is NS3, average total cost is N$4 and marginal cost is N54. In order to maximize profit, the firm should increase production. j. A perfectly competitive firm 5 currently producing an output level where price is N56, average variable cost is NS4, average cost is NSS.55 and marginal cost is N57. in order to maximize profit, the firm should decrease output. 2.4 In the principal-agent theory of a firm, the principal hires an agent to pursue the objectives of profit maximisation. However, the agent may seek to pursue a different objective. a) Explain how the principal may guard against this? Question Which of the following statements is true or false? 3. Monopoly and monopolistic competition are two different market structures b. Monopolistically competitive firms produce differentiated products c. Each firm in a monopolistically competitive market has a horizontal demand curve for its product
7 d. Each firm in a monopolistically competitive market has a specific demand curve for its product with a downward slope. e. Monopolistic competition is a market structure with many sellers selling homogenous product. f. An oligopoly is a market structure with many buyers and consists of only small number of firms selling a differentiated or homogenous product. g. An oligopoly is characterized by interdependence and uncertainty since the actions of one firm can spark a reaction from other firms in the industry, and it is impossible for any firm in this market structure to know exactly how its competitors h. Collusion, like cartel formation is possible in an oligopolistic market. will react. I. Decision on price and production taken by oligopolistic firm are interdependent. j. Price competition rather than non-price competition is used to retain or increase market share The supply and demand equation of a good are given by P = Q, + 8 p = 3Qd + 80 The government impose a tax t per unit. Find the value of t which maximises the government s total tax revenue on the assumption that equilibrium condition prevail in the market. (8 marks) 3.3. A firm is a perfectly competitive producer and sells two goods 61 and G; at N$1000 and N$8OO each. The total cost of producing these goods is given by TC 2Q12 +2Q1Q2 +Q22 = Where, Q1 and Q2 denote the output levels ofgl and G; a). Find the maximum profit and the values of Q1 and Q2 at which this is achieved.
8 (12 marks) Question A firm s unit capital and labour costs are N31 and N$2 respectively. If the production function is given by Q=4LK+L2 a). Find the maximum output and the level of K and L at which it is achieved when the total input costs are fixed at N$105 b). Verify that the ratio of marginal product to price is the same for both inputs at the optimum. (8 marks) 4.2. Use the Lagrange multiplier method to find the optimal value of the following. x2 3xy + 12x Subject to 2x+3y=6 4.3 Explain the following economic concepts a). b). c). d). e). f). lsoquant lsocost Externalities Price discrimination Duopoly Collusion (12 marks)