90629
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906290
SUPERVISOR’S USE ONLY
Level 3 Economics, 2011
90629 Understand marginal analysis
and the behaviour of firms
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Thursday ����������������
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November 2011
Credits: Five
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 room for any answer, use the extra space provided at the back of this booklet.
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.
Achievement Criteria
ASSESSOR’S USE ONLY
Achievement
Achievement with Merit
Achievement with Excellence
Describe the behaviour of firms
and the different markets in which
they operate.
Describe the behaviour of firms
and the different markets in which
they operate.
Describe the behaviour of firms
and the different markets in which
they operate.
Recognise marginal concepts
that relate to supply and demand.
Use marginal analysis to derive
the supply or demand curve.
Use marginal analysis to derive
supply or demand curves.
Use marginal analysis to
recognise equilibrium for the
perfectly competitive firm or the
monopolist.
Use marginal analysis to explain
equilibrium for the perfectly
competitive firm or the monopolist
in different markets.
Use marginal analysis to fully
explain changes in output and
pricing decisions for the perfectly
competitive firm or the monopolist
in different markets.
Overall level of performance (all criteria within a column are met)
© New Zealand Qualifications Authority, 2011. 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
You are advised to spend 45 minutes answering the questions in this booklet.
QUESTION ONE
The market for groceries in New Zealand is dominated by two competitors, Foodstuffs and
Progressive Enterprises Limited. Apart from these two dominant competitors, there are also
competitors like dairies and petrol stations, which have a very small market share, that also sell
grocery items.
(a)
State the type of market structure that the New Zealand groceries market is most likely to
represent.
(b)
Apart from the number of competitors, describe TWO other features of this type of market
structure.
(c)
Many dairies sell a similar range of food items. Apart from selling different food items,
describe TWO other ways in which a dairy can differentiate its products or services.
(d)Tauranga has more than 20 dairies. State the type of market structure in which dairies are
most likely to operate.
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QUESTION TWO
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Toni tried her first bungy jump during her holiday, and she would now like to do more jumps.
Freefall Bungy, where Toni did her jump, had a sign that said, “Bungy jumps $100. Take another
jump within seven days and pay only $60 for your second jump.”
(a)
Use the law of diminishing marginal utility and the optimum purchase rule to explain
why customers may not be prepared to pay the same price for their second bungy jump.
Toni paid $100 for her bungy jump and received $150 worth of marginal utility from it. Instead of
a bungy jump, she could have chosen to do a sky dive. The price of a sky dive is $200.
(b) Given that Toni chose to do a bungy jump instead of a sky dive, use the consumer
equilibrium formula (
MUb
MUa
) to explain why her marginal utility for a sky dive would
=
Pa
Pb
have been less than $300.
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(c)
Complete Table One below, calculating the missing total utility and marginal utility figures.
Table One: Toni’s Utility Schedule for Bungy Jumps
Number of jumps
Total Utility (TU) $
Marginal Utility (MU) $
1
150
2
230
3
(d)
60
4
330
5
330
40
Use the figures in Table One (above) to complete Table Two below.
Table Two: Toni’s Annual Demand
Schedule for Bungy Jumps
Price ($)
$40
$80
Quantity
demanded
$120
$160
(e)
(i)Toni did her bungy jump with Freefall Bungy. Complete Table Three below by
calculating the missing values. (Round all your figures to the nearest dollar.)
Table Three: Costs of Production for Freefall Bungy
Total cost
($)
Total
variable
cost
($)
Average
variable
cost
($)
Average
cost
($)
Marginal
cost
($)
19
1 560.00
760.00
40.00
82.11
35.00
20
1 620.00
Output / day
(Bungy
jumps)
21
41.00
60.00
885.00
42.14
80.24
43.41
79.77
22
1 755.00
955.00
23
1 835.00
1 035.00
Economics 90629, 2011
79.78
65.00
80.00
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(ii) Using the information in Table Three, calculate the total fixed cost for Freefall Bungy.
(f)
Answer:
Using the information in Table Three, complete Graph One below.
Price ($)
Graph One: Freefall Bungy’s Supply Curve for Bungy Jumps
0
20
21
22 23
Quantity
The owners of Freefall Bungy will use all of their savings of $200 000 to expand their business.
The owners currently earn 5% p.a. in interest on their savings. They will set up a new bungyjump operation in a different location. They estimate that the revenue from the new venture will
be $500 000 and they will need to spend $350 000 in setting up and operating the new venture.
(g)
Using the information above, explain the difference between the accounting cost and the
economic cost of the new bungy-jump operation.
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QUESTION THREE
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Dairy farmers are said to operate in a perfect competitive market.
(a)
If a dairy farmer is in perfect competition with all other dairy farmers, explain what will happen
to the farmer’s average revenue and marginal revenue if the farm increases its output
(quantity of milk produced).
MC
AC
Graph Three: The Market for Milk
Price ($)
Revenue / Cost ($)
Graph Two: An Individual Dairy Farmer
S
P
D
Quantity
(b)
(c)
Quantity
On Graph Two above:
(i) Add an appropriately placed average revenue curve (AR) and marginal revenue curve
(MR).
(ii) Identify the profit-maximising price (Pe ) and profit-maximising quantity (Qe ).
(iii) Shade in the area of profit made by the dairy farmer, and clearly label the type of profit
being made.
Use marginal analysis to explain why the dairy farm maximises its profit at Qe on Graph
Two.
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(d)
Use marginal analysis to fully explain the changes that will occur in the long run to the price
AND output in Graphs Two and Three.
In your full explanation:
•
Make appropriate changes to Graph Two AND Graph Three.
•
Clearly label the changes made to both graphs.
•
Refer to the changes that you made to the graphs in your explanation.
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QUESTION FOUR
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Fonterra is New Zealand’s largest business, and is said to have the monopoly over the market
for milk products. Fonterra announced an after-tax profit of $685 million for the year ended 31
July 2010.
Source (adapted): http://www.fonterra.com/wps/wcm/connect/b90f92004472bb27946cdeb7b0c23ace/230910+Media
+Release+FONTERRA+ANNOUNCES+200910+PAYOUT+OF+$6.70+BEFORE+RETENTIONS.pdf?MOD=AJPERE
S&CACHEID=b90f92004472bb27946cdeb7b0c23ace
Revenue / Cost ($)
Graph Four: A Monopolist Firm
MC
MR
(a)
(b)
Quantity
On Graph Four above:
(i) Draw and label an appropriately placed average revenue (AR) curve for a monopolist
firm.
(ii) Draw and label an appropriately placed average cost (AC) curve, to show the
monopolist firm making a supernormal profit.
(iii) Identify and label the profit-maximising price (Pe ) and profit-maximising quantity (Qe ).
(iv) Shade in the area of supernormal profit.
Use marginal analysis to explain why the monopolist will need to set the price at Pe to
maximise profits in Graph Four.
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(c)
Explain what type of profit the monopoly firm in Graph Four is likely to make in the long run.
(d)
Use marginal analysis to fully explain what effect an increase in demand for milk products
is likely to have on Fonterra’s output and pricing decisions. You do not have to show your
changes on Graph Four.
Include in your full explanation:
•
the effect on average revenue (AR) and marginal revenue (MR) of an increase in
demand for milk products
•
what decisions Fonterra is likely to make regarding its level of output and the price it
charges for milk products
•
the use of marginal analysis to explain Fonterra’s output and pricing decisions.
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QUESTION
NUMBER
Extra space if required.
Write the question number(s) if applicable.
Economics 90629, 2011
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11
QUESTION
NUMBER
Extra space if required.
Write the question number(s) if applicable.
Economics 90629, 2011
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90629