Economics  (BUS700)    

BUS700  Economics     Page  1  

 

TRIMESTER  2,  2015  

BUS700  MICROECONOMICS,  TUTORIAL  SEMINAR  3  

1. Technology  is  best  defined  as:  

a) all  production  methods  and  processes  that  increase  a  firm's  profit.  b) the  body  of  knowledge  that  exists  about  production  and  its  processes.  c) the  purchase  of  new  machinery  and  equipment  to  replace  old  machinery  and  

equipment.  d) new  machinery  and  processes  that  cause  the  disappearance  of  old  machinery  and  

processes.    2. Which  of  the  following  is  not  the  feature  of  perfectly  competitive  market?  

a) Many  sellers  and  many  buyers  b) Close  substitutes  are  not  available  c) Firms  in  perfect  competition  are  price  takers  d) no  barriers  to  entry  and/or  exit  e) All  players  are  well  informed  on  prices  

 3. The  monthly  payment  that  a  business  makes  on  a  building  it  has  leased  for  the  next  five  

years:    

a) Is  variable  cost  b) is  a  fixed  cost.  c) Is  a  sunk  cost  that  need  not  be  paid  if  the  business  produces  nothing.  d) is  a  long-­‐run  cost  since  the  building  has  been  leased  for  five  years.  e) all  of  the  above.  

 

                                                 4. The  total  cost  of  producing  three  units  of  output  is  ________  and  the  marginal  cost  is  

________    a) $12;  $76  b) $36;  $48  c) $106;  $18  d) $108;  48  

Economics  (BUS700)    

BUS700  Economics     Page  2  

 5. In  a  perfectly  competitive  market,  a  firm  maximises  its  profit  by  producing  the  quantity  of  output  

at  which:    a) Market  price  equals  average  fixed  cost.  b) Market  price  equals  marginal  cost.  c) Market  price  is  greater  than  marginal  cost.  d) Market  price  equals  minimum  average  variable  cost.  

 6. If  a  firm  faces  a  perfectly  elastic  demand  for  its  product,  then:  

a) It  will  always  make  zero  profit.  b) Its  marginal  revenue  curve  is  horizontal  at  the  market  price.  c) It  will  want  to  raise  its  price  to  increase  total  revenue.  d) It  will  want  to  lower  its  price  to  increase  sales.  

7. Explain  the  following  economic  terms  in  relation  to  production  of  output  in  the  short  run:  

  (a)  sunk  cost       (b)  Shut  down  point  and  its  relationship  with  the  firm  and  market  supply  curve    

8. Suppose  firm  A  in  a  competitive  industry  somehow  develops  a  new  technology  which  enables  it  alone  to  completely  eliminate  diseconomies  of  scale.  no  matter  how  large  a  factory  it  builds.  What  would  its  long  run  average  total  cost  curve  look  like  then?  What  would  eventually  happen  to  its  competitors?  

 

 The  firm  would  continue  to  experience  economies  of  scale  and,  overtime,  end  up  as  the  only  firm  in  the  industry.    Other  producers  would  have  had  higher  average  costs  and,  therefore,  would  not  have  been  able  to  match  firm  A’s.  

9. Assume  that  the  iron-­‐mining  industry  is  competitive.  a.   Illustrate   a   long-­‐run   equilibrium   using   diagrams   for   the   iron   market   and   for   a  representative  iron  mine.  

b.  Suppose  that  an  increase  in  steel  demand  induces  a  surge  in  the  demand  for  iron.  Using  your  diagrams,  show  what  happens  in  the  short  run  to  the  iron  market  and  to  each  existing  iron  mine.  

c.   If   the   demand   for   iron   remains   high,   what   would   happen   to   the   price   over   time?  Specifically,   would   the   new   long-­‐run   equilibrium   price   be   above,   below   or   equal   to   the  short-­‐run  equilibrium  price  in  part  (b)?