Level 3 Economics, 2013

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1 SUPERVISOR S Level 3 Economics, Demonstrate understanding of the efficiency of different market structures using marginal analysis 9.30 am Monday 18 November 2013 Credits: Four Achievement Achievement with Merit Achievement with Excellence Demonstrate understanding of the efficiency of different market structures using marginal analysis. Demonstrate in-depth understanding of the efficiency of different market structures using marginal analysis. Demonstrate comprehensive understanding of the efficiency of different market structures using marginal analysis. Check that the National Student Number (NSN) on your admission slip is the same as the number at the top of this page. You should attempt ALL the questions in this booklet. If you need more space for any answer, use the page(s) provided at the back of this booklet and clearly number the question. Check that this booklet has pages 2 11 in the correct order and that none of these pages is blank. YOU MUST HAND THIS BOOKLET TO THE SUPERVISOR AT THE END OF THE EXAMINATION. TOTAL New Zealand Qualifications Authority, All rights reserved. No part of this publication may be reproduced by any means without the prior permission of the New Zealand Qualifications Authority.

2 2 You are advised to spend one hour answering the questions in this booklet. QUESTION ONE In markets where there is little or no competition, the Commerce Commission may need to regulate the price and quantity of goods and services to benefit consumers. Source: The Commerce Commission has announced a reduction in wholesale price for Chorus local copper lines. The price reduction applies to the local copper lines between homes or businesses and an exchange. Source (adapted): Commerce Commission Media Release, 3 December 2012 Complete (a) to (c) to demonstrate your understanding of the efficiency of monopolies. (a) Complete Graph One to show: (i) the profit maximising quantity (Q p ) and price (P p ) that the monopolist will charge (ii) the equilibrium price (P 0 ) and quantity (Q 0 ), if the market was allocatively efficient (iii) use letters (a, b, c etc) to identify the area of deadweight loss of producing at Q p P p. Costs/ Revenue $ Graph One The market for fixed phone lines in rural areas MC P 1 AC MR D AR Quantity The Commerce Commission could choose to regulate a monopoly by regulating the price to P 1. (b) Shade the area on Graph One to show deadweight loss that exists when the market for fixed phone lines in rural areas is at P 1.

3 3 (c) Compare and contrast the efficiency of the market, at prices P 0, P p, and P 1. In your answer: explain why the market is allocatively efficient at P 0 compare the allocative efficiency of the market at P p and P 1 explain why the Commerce Commission needs to regulate refer to Graph One in your explanations.

4 4 QUESTION TWO Farm debt warning The November Financial Stability Report from the Reserve Bank painted a portrait of a heavily indebted farm sector, or as Federated Farmers president Bruce Wills terms it: The most indebted farming industry on Earth. Falls in commodity prices, the result, in part, of growing world production levels, have led to debt pressures. Dairy debt accounted for around 10 per cent of aggregate bank and non-bank lending and 63 per cent of lending to the agriculture sector. Almost half of this debt was held by the most indebted 10 per cent of farmers, leaving those farmers highly exposed when milk prices fell sharply in the wake of the global financial crisis. Source: 2 December 2012 Dairy farmers are seen as examples of perfect competitors. Use the resource material above and Graph Two and Graph Three to compare and contrast the impact of falling dairy prices on dairy farmers with differing levels of debt. Costs / Revenue $ Graph Two Dairy farmer with low debt MC Costs / Revenue $ Graph Three Dairy farmer with high debt MC AC P 1 D AR MR P 1 AC D AR MR P 2 P2 Quantity Quantity (a) On each of Graph Two and Graph Three: label the profit-maximising quantity Q 1 when the price is P 1 show the effect of the price falling to P 2 label the new profit-maximising quantity Q 2.

5 5 (b) Use marginal analysis to explain in detail the changes in output from Q 1 to Q 2 for either farmer. (c) Compare and contrast the impact of the fall in price to P 2 on farmers with low debt, and those with high debt. In your answer: shade in and label Graphs Two and Three to identify the profits made by the farmer with low debt and the farmer with high debt at prices P 1 and P 2 refer to the resource material, changes you have made on the graphs, and the types of profits made by each farmer at P 1 and P 2 explain why the farmer with high debt will leave the market. Answer space continues on page 6

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7 7 This page has been deliberately left blank. The examination continues on the following page.

8 8 QUESTION THREE Complete (a) to (d) to compare and contrast the output decisions of perfect competitors and monopolists in the short run and the long run, using marginal analysis. Costs / Revenue $ Graph Four The perfectly competitive apple grower Costs / Revenue $ Graph Five The market for apples MC S D Quantity Quantity Graph Six The monopolist Costs/ Revenue $ MC MR D AR Quantity (a) Complete Graph Four and Graph Five to show the profit maximising quantity (Q 1 ) and price (P 1 ) for the perfect competitor in the short run. Label the market quantity at this price as Q m. (b) Complete Graph Six to show the profit maximising quantity (Q 2 ) and price (P 2 ) for the monopolist. (c) On both Graph Four and Graph Six, place an appropriately drawn Average Cost curve to show both the perfect competitor and the monopolist making supernormal profits. Shade the area of the supernormal profit on each graph.

9 9 (d) Use marginal analysis to compare and contrast the long-run output and pricing decisions of the perfect competitor, and the monopolist, when they are both making supernormal profits in the short run. In your answer: refer to the distinguishing features of each market structure explain how price is determined in each market structure make changes, as appropriate, to Graphs Four, Five, and Six to illustrate the long-run situation in each market refer to the changes you have made to the graphs.

10 10 QUESTION NUMBER Extra space if required. Write the question number(s) if applicable.

11 11 QUESTION NUMBER Extra space if required. Write the question number(s) if applicable.

12 91400

Level 3 Economics, 2014

91400 914000 3SUPERVISOR S Level 3 Economics, 2014 91400 Demonstrate understanding of the efficiency of different market structures using marginal analysis 9.30 am Tuesday 25 November 2014 Credits: Four