Section Two Questions (Microeconomics)

SECTION TWO QUESTIONS (MICROECONOMICS)

1. What alternative solutions might an economist suggest to the problem of traffic congestion? What are the advantages and disadvantages of each of these solutions? 

2. Under what conditions can a firm sell the same product at different prices? 

3. European governments have a policy of supporting farm incomes with artificially higher prices for certain foodstuffs. What are the economic effects of this on Europe and the rest of the world? 

4. Pollution is sometimes said to be an example of market failure. What is meant by this? How might governments encourage markets to work towards helping solve environmental problems? 

5. In what circumstances might a government use price controls to influence a market? 

6. Is the existence of monopoly in an industry likely to improve or worsen resource allocation? 

7. Why are many industries, such as car manufacturing, becoming more oligopolistic? How are the price and output decisions of firms affected by this trend? 

8. Economic theory makes certain assumptions about market conditions, in order to study how firms decide on prices and output. Are these assumptions realistic, and do firms always behave in the real world as Economics textbooks predict? 

9. Briefly explain what economists mean by the word ‘market’. What kind of problems are markets good at solving, and what are they bad at solving? 

10. Why does there appear to be a movement towards oligopoly in certain markets? How does this movement affect the way in which producers make decisions, and how does it affect the welfare of consumers? 

11. Evaluate the roles of ‘markets’ and ‘planning’ in an economy today? How are these roles likely to change? 

12. What are the assumptions behind the model of a perfectly competitive industry in long-

run equilibrium? Why do economists make assumptions of this sort? Are such assumptions realistic? 

13. (a) Why are profits important in a market economy? (b) What problems might a country experience if it tries to use the profit motive to produce everything? 

14. (a) What are economies of scale, and why have they become so important in modern economics?(b) In view of this importance, why do so many small enterprises operate successfully in the world today? 

15. (a) Explain what externalities are and how they may arise. (b) Discuss whether governments should always involve themselves in markets with substantial externalities.

16. (a) What are the main features of an oligopolistic market? (b) Do oligopolies work in favor of, or against the interest of consumers?

17. (a) What do economists mean by ‘externalities’ or spillover effects? (b) How does an understanding of externalities (spillover effects) assists economists in analyzing environmental problems? 

18. (a) What are ‘natural monopolies’ and why are they considered a danger if left unregulated? (b) Is nationalization of natural monopolies the best method of improving their economic efficiency?

19. (a) Distinguish between private costs and benefits and social costs and benefits. (8) (b) Explain how an increase in the number of cars n the roads of a country might lead to a misallocation of resources. (8) (c) Evaluate the ways in which a government might remedy this misallocation. (9) 

20. (a) Carefully explain what is it that price, income and cross elasticities of demand are meant to measure. (b) Discuss the practical importance of the concept of price elasticity of demand for (i) business organizations (ii) the government 

21. (a) Why do environmental issues cause problems to economists? (b) What solutions might an economist suggest to the problem of overfishing? 

22. (a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve. (10) 

(b) Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on (i) The market for cars. (ii) The market for coal. (15) 

23. “Monopoly price is higher and output smaller than is socially ideal. The public is a victim.” (J.K. Galbraith, 1974) (a) Explain to economic reasoning behind the statement that “monopoly price is higher and output smaller than is socially ideal.” (12) (b) Do you agree that the public is always the victim of monopoly? Justify your answer. (13) 

24. (a) Why are environmental problems considered to be an example of market failure? (10) (b) To what extent can government intervention correct this failure? 

25. (a) Under what conditions is price discrimination possible and profitable? (12) (b) Who gains and who loses from price discrimination? Illustrate your answer with examples. (13) 

26. (a) Using suitable diagrams, explain why there is likely to be an absence of long run economic profits in perfect competition. (12) (b) To what extent might consumers benefit from increased competition between firms? (13) 

27. (a) How does a monopoly maintain supernormal (or abnormal) profit in the long run? (12) (b) Is monopoly always undesirable? (13) 

28. Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly. 

29. (a) Why is pollution an example of market failure? (10) (b) To what extent can the market system protect the environment? (15) 

30. (a) What does an economist mean by efficiency in the operation of a firm? (10) (b) Discuss whether the achievement of efficiency is possible and desirable. (15) 

31. (a) What role do prices play in the allocation of resources in free market economics? (b) Evaluate the options available to governments to overcome the failure of markets arising from the production and consumption of demerit goods. Illustrate your answer with the examples where possible. 

32. (a) Outline the ways in which monopoly power might arise. (b) Evaluate the extent to which governments should seek to control the growth of monopoly power. 

33. ‘National policies and international agreements must be implemented in order to reduce global environmental problems’. 

(a) Using the concepts of market failure, explain the statement above from an economist’s point of view. (b) With references to both national policies and international agreements, present and evaluate three solutions that could be recommended by economists. 

34. Discuss the economic arguments for and against imposing substantially higher levels of taxation on the sale of alcohol. 

35. (a) In what ways do firms operating in different market structures compete? (b) Discuss the view that the more competition there is within each industry, the better. 

36. (a) Explain the concepts of maximum and minimum price controls. (b) Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects. 

37. (a) Explain how a monopolist may be able to earn supernormal (abnormal) profits in the long run (10 marks) (b) ‘Production by a monopolist will always be against the interests of consumers’. Discuss. (15 marks) 

38. (a) Explain how profit is determined in perfect competition (10 marks) (b) ‘Whatever the type of market structure, profit maximization will always be the only goal of firms’. Discuss. (15 marks) 

39. (a) Explain the differences between monopolistic competition and oligopoly as market structures (10 marks) (b) Discuss the differences between a collusive and a non-collusive oligopoly (10 marks) 

40. (a) Carefully distinguish between merit goods, demerit goods and public goods (10 marks) (b) Evaluate the view that governments should always intervene in markets for such goods as cigarettes and alcohol (15 marks) 

41. (a) Explain the necessary conditions for price discrimination to take place (10 marks) (b) Discuss the advantages and disadvantages of price discrimination for consumers and producers (15 marks) 

42. (a) Explain how barriers to entry may affect market structure (10 marks) (b) Evaluate the view that monopoly is an undesirable type of market structure (15 marks) 

43. (a) Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition (10 marks) (b) ‘Perfect competition is a more desirable market form than monopolistic competition’. Discuss. (15 marks) 

43. (a) Explain how a firm operating in an oligopolistic market might attempt to increase its market share (10 marks) (b) Evaluate the view that producers, and not consumers, are the main beneficiaries of oligopolistic market structures 

44. (a) Explain the determinants of price elasticity of demand. (10 marks) (b) ‘A deterioration in a country’s terms of trade will always be disadvantageous for the current account balance.’ Evaluate this statement using the concept of price elasticity of demand. (15 marks) 

45. (a) Explain the concepts of allocative and productive (technical) efficiency. (10 marks) 

(b) ’Monopolies are inefficient and therefore always act against the public interest’. Discuss this statement. (15 marks) 

Short Essays

46. Compare the operation of a cartel with the operation of a competitive market.

47. Outline the factors, which determine the shape of a firm's cost curves, using diagrams and an example.

48. In what circumstances will price discrimination be profitable for a firm?

49. Why might the elasticity of supply for a given product vary over time? Give an example.

50. Explain why economists distinguish between the short-run and long-run when examining how the costs of a firm behave as output increases.

51. Use supply and demand analysis to demonstrate why lines of people often form when prices are controlled.

52. With the aid of a diagram describe how knowledge of supply and demand analysis might help a city council, which is looking for ways of reducing traffic congestion in its city centre.

53. Explain how the law of diminishing returns is relevant to the problem of insufficient food production in certain countries.

54. How might the elasticity of a demand curve affect the shape of its total revenue curve?

55. In the short-run, at what price level will a perfectly competitive firm be prepared to produce?

56. A government is thinking of raising revenue through expenditure taxes. Why would knowledge of price elasticities of demand be useful?

57. Using supply and demand curves, explain how buffer stocks might be used to try to stabilize agricultural prices.

58. Under what circumstances might consumers benefit from the existence of a monopoly?

59. In many developed countries the price of house has risen steadily over the recent years, while more and more people have been buying houses. Use supply and demand analysis to explain why this has happened.

60. Explain the difference between ‘diseconomies of scale’ in the long-run and ‘diminishing returns’ in the short-run.

61. Define the word ‘cartel’ and with an example explain what cartels try to achieve.

62. What would be the main externalities of a decision to build a new international airport near your school or home.

63. Discuss how a monopoly might produce a higher output at a lower price than a perfectly competitive industry.

64. Briefly state what is meant by the productivity of a factor. For what reasons might the productivity of land change over time?

65. A government tries to deal with the problem of homelessness by putting rent controls on housing. Use a supply and demand diagram to explain why other policies will also be

necessary.

66. Explain why an oligopolistic firm might not wish to alter its prices.

67. What determines whether the supply of a product is price elastic or price inelastic?

68. A government imposes an indirect tax on the supply of a good with zero price elasticity of demand. Using a diagram, explain why consumers, not producers, could in the end pay this tax.

69. A monopolist decided to maximize total revenue instead of maximizing profit. Predict the effect this will have on price and output. Use a diagram to support your prediction.

70. Why is the concept of ‘scarcity’ important in rich countries as well as poor ones?

71. A business person believes that halving her prices will double her revenue. Explain why this might not happen.

72. A perfectly competitive industry is turned into a monopoly. Predict the effect on price and output.

73. In what circumstances might the existence of a monopoly benefit the public?

74. “In some countries the price of houses rises while the demand for houses rises.” Using supply and demand analysis, explain why this statement does not contradict the law of demand.

75. How might a firm be able to stay in business in the short-run, even if it is not covering all of its costs?

76. What are the distinguishing features of a ‘pure public good’?

77. Show how a supply and demand diagram could be used by an economist to help predict the possible results of introducing a national minimum wage.

78. A survey among 200 passengers on an aircraft reveals that people might have paid 50 different prices. Why has this happened?

79. The choice between military products and the provision of health care illustrates the

problem of ‘opportunity cost’. Explain the nature of the problem, using a production possibility frontier to help you.

80. Using a suitable diagram, predict what will happen to efficiency when a competitive industry is monopolised.]

81. Explain why countries with different economic systems face the same fundamental economic problems.

82. Why might a firm be interested to know the various elasticities of demand for its product?

83. What is meant by market failure? Explain why pollution may cause market failure.

84. Explain why the price elasticities of both demand and supply of primary commodities tend to be relatively low in the short-run.

85. In what ways might a company operating within an oligopolistic market structure attempt to increase its share in the market?

86. Why does the weekly price of a hotel room in a popular holiday resort vary through the year?

87. What are the distinctions between decreasing returns to scale and diminishing marginal returns?

88. Distinguish between the law of diminishing returns and decreasing returns to scale.

89. Why is pollution an example of market failure? Use a diagram to illustrate your answer.

90. The price of tickets for a major tennis tournament is fixed by the organising body. At the set price, many more people wish to attend the tournament than there are seats available. Draw a diagram to illustrate this situation and use your diagram to examine the likely consequences.

91. A bus company decided to reduce passenger fares. Explain the possible outcomes of this decision using economic concepts.

92. What is a positive externality? Give an example and illustrate your answer with a diagram.

93. Why do some oligopolistic firms engage in non-price rather than price competition?

94. ‘Economics is primarily concerned with the allocation of scarce resources which have alternative uses’. Use a production possibility curve to help you explain this statement. 

95. Explain how indirect taxation (Pigovian taxes) may be an appropriate response to the problem of negative externalities.

96. Explain why firms operating in a perfectly competitive market would be able to make only normal profits in the long run.

97. Why do the prices of agricultural goods tend to fluctuate more than those of manufactured goods?

98. A government increases taxation on the sale of tobacco. Using a diagram explain how this might affect consumers and producers of tobacco.

99. Using a diagram explain how allocative and productive efficiency will be achieved in long run equilibrium in perfect competition.

100. ‘As price falls, quantity supplied falls. As supply increases, price falls’. Use supply and demand analysis to explain why these two statements do not contradict each other. 

101. Why is the concept of income elasticity of demand likely to be important for a producer of an agricultural product? Use supply and demand analysis in your answer.

102. A firm in perfect competition is producing at the profit maximizing output but making a loss. Using diagrammatic analysis explain how this is possible.

103. Use a diagram to explain why the under provision of merit goods is considered to be an example of market failure.

104. Use a diagram to explain how producers and consumers might benefit from a government subsidy to an industry.

105. With the help of a diagram, explain how a buffer stock scheme is expected to work.

106. A monopolist decides to maximize profits rather than revenue. Using a diagram, explain how price and quantity will change.

107. a. Explain why Veblen goods are an exception to the law of demand

b. To what extent can a firm in monopolistic competition earn supernormal (abnormal)

profits?

c. Compare the impact of an indirect tax on the market for cigarettes with the impact of an indirect tax on the market for holidays.

108. Use production possibility curve diagrams to explain the differences between actual output and potential output and between economic growth and economic development.

109. Explain the relationship in the short-run between the marginal costs of a firm and its average total costs.

110. Using appropriate diagrams, explain the difference between the law of diminishing returns and economies of scale.

111. Using demand and supply analysis, explain how resources are allocated through changes in prices in a market economy.

112. Define cross elasticity of demand and using diagrams explain what determines whether cross elasticity is positive or negative.

113. Using appropriate diagrams, discuss whether monopoly is more efficient or less efficient than perfect competition

114. Use a diagram to explain how the incidence (burden) of a tax is shared among producers and consumers when an ad valorem indirect tax is placed on a good which has relatively inelastic demand.

115. A monopoly firm decides to maximize revenue rather than profit. Use a diagram to explain what will happen to price and quantity.

116. ‘Normally, it would be expected that more would be demanded at lower prices as opposed to higher prices, all other things being equal, but this may not always be the case’. Explain this statement.

117. Explain the law of diminishing returns using average and marginal product curves.

118. Explain how scarce factors of production are allocated by the free market.

119. With the help of a diagram, explain when a firm should shut down in the short run.

120. Explain the concept of a natural monopoly

121. Explain what is meant by a production possibility curve and use a production possibility curve diagram to explain the concepts of scarcity, efficiency, choice and opportunity cost.

122. A concert is being held in a stadium with limited seating capacity. The organizers set the ticket prices at a level below the equilibrium price. Using a diagram, explain the possible consequences of their decision.

123. Using at least one diagram, explain the difference between profit maximization and sales revenue maximization as goals of the firm.

124. Explain how the three basic economic questions would be answered in a free market economy and in a centrally-planned economy.

125. Using diagrams, explain the difference between the short-run and long-run profit maximizing positions of a firm in monopolistic competition.

126. Explain how the burning of fossil fuels (e.g. coal) by industries could create a market failure and a threat to sustainable development.

127. Draw a diagram of a perfectly competitive firm in short-run equilibrium. Assume this firm is earning economic profits. Be sure to identify all relevant cost and revenue curves and the area of profit.