POLYTECHNIC OF NAMIBIA
SCHOOL OF MANAGEMENT SCIENCES
DEPARTMENT OF ECONOMICS
INDUSTRIAL ECONOMICS
IEC312S
FEEDBACK LETTER ON MARKED ASSIGNMENT 2
Dear Students
The assignment was well attempted and you showed good efforts in attempting to answer all
questions and I am happy with the results
Please feel free to consult on all topics which you think are a challenge to you. Use the
attached model answers for assignment 1 as guide when making corrections and revisions on
your assignment.
I wish you the best of luck on your examination.
INSTRUCTIONS/REQUIREMENTS FOR ASSIGNMENT TWO
• Read the answers thoroughly and ensure that you understand them,
Question One
[20 marks]
a) Rent-seeking-actions of individuals and groups who spend resources to influence public policy in the
hope of redistributing income to themselves from others
b) Economies of scale- if economies of scale are extensive, then in order to enter on a cost competitive
basis, a new entrant requires significant market share
c) Transaction Cost- transaction cost matters, e.g search cost-labor, parts inventory; haggling costlabor contract; contracts, monitoring performance, enforcing contractual promises.
d) Product differentiation- when products produced by different firms are not viewed as perfect
substitutes
e) Satisficing because of the great complexity of running the large modern corporation-a task often
complicated by uncertainty and a lack of adequate data
Question Two
[21 marks]
Complete the table below and fill in the missing characteristics of the given market structures
Market structure
Goal of the firm (3
marks)
Perfect competition
Monopolistic
competition
Monopoly
Profit maximisation
rule (3 marks)
MR=MC
MR=MC
MR=MC
Types of profit earned
(3 marks)
NORMAL
ABNORMAL
ABNORMAL
Market power (3
marks)
NO
YES
YES
Price and welfaremaximising level of
output (state
condition) (6 marks)
P = MC
P > MC
P > MC
Long-run profits
outcome (3 marks)
NO
NO
YES
Question Three
[24 marks]
The production manager of Omotuli Investment firm has output target of 1500 per month. The price of
labor and capital is N$5 and N$10 respectively. Omotuli Investment has a production function of
𝑄 = 6𝐾 ∝ 𝐿𝛽 . Q is output, K is capital and L is labor. As an economist, you are requested to advice the
manager on the combination of inputs ( K and L ) that will help the manager to reach the target at a
lowest possible cost.
Total costs or total outlay: 𝑻𝑻 = 𝟓𝟓 + 𝟏𝟏𝟏
Production function: 𝑸 = 𝟔𝑲𝜶 𝑳𝜷 where by Q = 1500
Lagrangian function: 𝑳 = 𝟓𝟓 + 𝟏𝟏𝟏 + 𝝀[𝟏𝟏𝟏𝟏 − 𝟔𝑲𝜶 𝑳𝜷 ]
(1)
Partial derivative with respect to K, L and 𝝀
𝑳𝒌 = 𝟓 − 𝟑𝝀𝝀𝜶−𝟏 𝑳𝜷 = 𝟎
(2)
𝑳𝒍 = 𝟏𝟏 − 𝟑𝝀𝝀𝜶 𝑳𝜷−𝟏 = 𝟎
𝑳𝝀 = 𝟏𝟏𝟏𝟏 − 𝟔𝑲𝜶 𝑳𝜷 = 𝟎
(3)
(4)
Solve for 𝝀 from equation 2 and 3
𝝀=
𝝀=
𝟓𝟓
𝟔𝑲𝜶 𝑳𝜷
𝟏𝟏𝟏
𝟔𝑲𝜶 𝑳𝜷
Equate 𝝀 = 𝝀
𝟏𝟏𝟏
𝟓𝟓
=
𝜶
𝜷
𝟔𝑲𝜶 𝑳𝜷
𝟔𝑲 𝑳
Students are expected to derive the values of K and L from the above equation and substitute it into
𝟎𝟎 − 𝟔𝑲𝜶 𝑳𝜷 = 𝟎 .