Question 4 25 Marks a) The Head of Economics and Research Department of Industri
ID: 1137122 • Letter: Q
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Question 4 25 Marks a) The Head of Economics and Research Department of Industrial Development Corporation tried to determine the marginal cost of one of the company's client. It was revealed that the client's firm operates under the market defined as the monopolistic competition. The following demand and cost functions were determined; Demand P 140-4Q Cost TC-1200-12Q2 +2Q3 Where P and TC are in Kwacha and Q is in thousands of units Further analysis revealed the following MR 140-8Q MC 120-240 +6Q i.Outline the main conditions/features of the market structure under c ii Calculate the output that the firm will produce. (recall that any form under the iii. Find the exact amount of maximum profit. is a 141 . Using a well labelled diagram explain the long run equilibrium for this firm. [7] b) What is the difference between demand and quantity demanded? c) What is an indifference curve? 12) 12)Explanation / Answer
i. The features of the monopolistic market are:-
1. There are many buyers and sellers in the market, and no seller has an absolute control over the market price.
2. There is free entry and exit of firms.
3. There is a differentiation of products that are sold by the producers and hence the products are not perfect substitutes
4. There is lack of perfect knowledge of the market amongst both buyers and sellers. The buyers do not have full information about the quality and prices of all the products. Similarly, the seller does not have the exact information about the consumer preferences.
5. Less mobility of factors of production as well as the goods and services.
6. The elasticity of demand is high, and thus in order to sell more the firms must reduce the price of its products.
ii). The profit-maximizing condition is MR=MC
Thus, 140 - 8Q = 120 - 24Q + 6Q2
6Q2 -16Q - 20 = 0
3Q2 - 8Q - 10 = 0 (We divided the entire equation by 2)
Q = (-b + - (b2 - 4ac)1/2 ) /2a
Q = (8 + - (64+120)1/2)/ 6
Q = (8 + 13.56)/6 = 3.59
We will be taking only the positive sign into consideration because quantity of output cannot be negative.
Thus quantity is approx. equal to 4.
Exact profit = TR - TC
TR = P*Q
(140(4) - 4(16)) - (120(4) - 12(16) + 2(64))
= 560 - 64 - 480 + 192 - 128
= 80
ii). Demand is the defined as the willingness of the buyer and his ability to pay for the good or service. It is affected by factors other than price like consumer tastes, the price of substitute goods etc. It involves a shift in demand curve due to factors other than price
On the other hand, quantity demanded is the exact quantity of good or service that is demanded by a consumer at a particular price. It is affected only by price and the movement is along the demand curve.
iii). An indifference curve is a downward sloping convex curve which shows all possible combinations of two goods or service providing an equal level of utility at each and every point on the curve.
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