Discuss and show how a price-taking firm determines its profit-maximising output level.

Assignment 1

Weighting: 25%

Note that when you are answering questions that require mathematical calculations, you should provide details as to how the answers were derived. In completing your answers, you should use graphs wherever possible. Always provide a brief explanation of each graph, including how it relates to your overall answer/argument.

Question 1

a. The following is a set of hypothetical production possibilities for a nation A.

Combination Bicycles

(thousands) Wheat

(thousands of tonnes)

A 0 10

B 2 9

C 4 7

D 6 4

E 8 0

i) Plot the production possibility for nation A.

ii) What is the opportunity cost of the first 2000 bicycles produced?

iii) Determine between which point the opportunity cost per thousand bicycles is highest.

iv) Show what would happen to the production possibility frontier if nation A introduced an improved fertiliser that is used by its wheat farmers.

v) Explain how the production possibilities frontier reflects the law of increasing opportunity costs.

(Parts i to v are worth a mark each.)

b. Compare the advantages and disadvantages of a planned economy and a free-market (300 words maximum).

(5 marks)

Question 2

a. The Australian wine industry has prospered over the last two decades, expanding rapidly into overseas markets. However, in recent years it has faced some problems. Use demand and supply analysis to explain how these two factors (problems) stated below would affect the price and quantity of Australian wine.

i) There has been a rapid increase in the Australian production of wine grapes.

ii) New wine producers in China and India are producing good quality low cost wine.

(Parts i and ii are worth 2 marks each.)

b. In an attempt to support the Australian wine industry the government sets a minimum price. Do you think this is a good idea? Explain your decision using graphs.

(6 marks)

Question 3

a. Explain why a firm can make a loss and continue operating in the short-run, and under what circumstances it will shut down.

(3 marks)

b. Discuss and show how a price-taking firm determines its profit-maximising output level.

(3 marks)

c. The Byron Bicycle Company produces high quality bicycles. The firm has fixed costs of \$1,000 and the wage cost for each worker is \$500 (assume these are the company’s only cost). Complete the table below.

Workers Output Marginal Product Total Cost Average variable cost Marginal cost

0 0

1 20

2 50

3 90

4 120

5 140

6 150

7 155

(4 marks)

Question 4

Use graphs to explain and illustrate the profit-maximising price and output for firms in the perfect market and for those in the monopoly market. Explain why monopoly firms are able to earn supernormal profits in the long run.

(10 marks)

Question 5

Explain why pollution is an example of market failure and why the free market will not provide an efficient solution to the problem. Provide a critique of a carbon tax as opposed to the Australian government’s ‘Direct Action’ as a solution to this problem (700 words maximum).

(10 marks)

TOTAL FOR ASSIGNMENT 1: 50 marks (weighting 25% of total marks for the unit)

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