90629
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906290
SUPERVISOR’S USE ONLY
Level 3 Economics, 2012
90629 Understand marginal analysis and
the behaviour of firms
9.30 am Monday 19 November 2012
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 – 14 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, 2012. All rights reserved.
No part of this publication may be reproduced by any means without the prior permission of the New Zealand Qualifications Authority.
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You are advised to spend 45 minutes answering the questions in this booklet.
QUESTION ONE
In 2011, 412 000 New Zealanders changed power companies, compared with 367 000 who
changed power companies in 2010. This shows a growing awareness of money-saving
strategies.
In January 2012, there were 18 electricity suppliers listed in New Zealand, but for consumers in
South Canterbury there were only five electricity suppliers available.
Sources (adapted): http://www.rotoruadailypost.co.nz/news/power-users-switch-on-to-betterdeals1/1241612
http://www/powerswitch.org.nz/powerswitch/site-info/providers
(a)
Given the number of electricity suppliers in the South Canterbury market, identify the most
likely market structure for household electricity in South Canterbury.
(b)
Other than the number of suppliers, describe TWO characteristics of the market structure you
identified in (a).
(c)
Other than profit maximisation, describe an alternative goal a power company might have
when they encourage customers to switch to the company as their electricity supplier.
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QUESTION TWO
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Robbie has a new tablet computer. He has a SIM card in the tablet, which he uses to access the
Internet over his mobile phone network. He purchases data by the gigabyte (GB).
(a)
Complete Table One below, calculating the missing total utility figures and the marginal
utility figures.
Table One: Robbie’s utility schedule for prepaid Internet data
GB per month
Total utility (TU) ($)
1
20
Marginal utility (MU) ($)
(iii)
2
(i)
15
3
(ii)
12
4
55
(iv)
(b)
If the price per gigabyte is $10, use the optimum purchase rule to explain how many
gigabytes Robbie will purchase per month.
(c)
Using the information from Table One, complete Graph One below, and draw Robbie’s
demand curve for Internet data.
Graph One: Robbie’s demand curve for prepaid Internet data
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Robbie likes to use his tablet computer in cafes where there is free Wi-Fi available, in
particular at Café Tuscany, where they sell cappuccinos.
(d)
Complete Table Two below, calculating the missing cost values.
Table Two: Cost structure for Café Tuscany
Output / hour
(Cappuccinos)
Average
variable cost
($)
Average cost
($)
Total cost
($)
5
1.15
2.15
6
1.20
2.03
12.20
1.45
7
1.30
2.01
14.10
1.90
8
1.40
2.03
16.20
2.10
9
1.60
2.16
19.40
10
1.90
(Rounded to the
nearest cent)
Marginal cost
($)
(ii)
(i)
1.00
(iii)
24.00
4.60
(e)
Assume Café Tuscany is a perfect competitor. Use the information in Table Two and the
break-even point to explain why Café Tuscany will not break even if it produces less than
eight cappuccinos per hour.
(f)
Complete Table Three below using the information from Table Two.
Table Three: Café Tuscany supply of cappuccinos per hour
Price ($)
Quantity supplied
1.00
1.45
1.90
2.10
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QUESTION THREE
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Graph Two: A monopolist firm
MC
Revenue / Cost
($)
AC
AR
Quantity
(a)
On Graph Two above:
(i) Draw an appropriately placed and labelled marginal revenue (MR) curve.
(ii) Identify the profit-maximising price (Pe) and profit-maximising quantity (Qe).
(iii) Shade, and clearly label, the type of profit the monopolist firm will make at the
profit-maximising equilibrium.
(b)
Use marginal analysis to explain why the monopolist firm maximises profit at Qe.
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(c)
Given the profit you identified on Graph Two is the short-run equilibrium position, state what
the long-run equilibrium position will be, and explain why.
(d)
Using marginal analysis, fully explain how an increase in variable costs would affect the
profit-maximising equilibrium of a monopolist firm.
In your answer:
•
make the appropriate changes to Graph Two
•
clearly label the changes made to Graph Two
•
refer to changes that you made to Graph Two
•
fully explain any change in price, output, and profit made.
The lines for Question Three (d) continue on page 8 ➤
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This page has been deliberately left blank.
The examination continues on the following page.
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QUESTION FOUR
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Many agricultural and horticultural producers, such as wheat growers, are considered to be
examples of perfectly competitive firms.
The domestic price in the wheat market has fluctuated from a low of $300 / tonne to
approximately $450 / tonne in the last year.
Source (adapted): http://www.uwg.co.nz/prices/index.cfm
(a)
Describe why a wheat grower could be considered a perfectly competitive firm in terms of the
price of wheat.
Graph Three: A perfectly competitive wheat-growing farmer
MC
Revenue / Cost
($)
AC
450
300
Quantity (tonnes)
(b)
Assuming this wheat grower is receiving $300 / tonne and is making a subnormal profit at
that price, on Graph Three above:
(i) Add appropriately placed average revenue (AR) and marginal revenue (MR) curves
for a perfectly competitive firm.
(ii) Identify the profit-maximising equilibrium price (Pe) and profit-maximising
equilibrium quantity (Qe).
(iii) Shade in the area that represents the subnormal profit at the profit-maximising
equilibrium.
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(c)
Explain what the marginal revenue will be when the average revenue for a perfectly
competitive wheat grower is $300 / tonne.
The rise in wheat price to $450 / tonne could be explained by an increase in demand for
wheat.
(d)
With a starting position of $300 / tonne, use marginal analysis to fully explain the effect of a
rise in the price of wheat to $450 / tonne on a perfectly competitive wheat grower.
In your answer:
•
•
•
•
make appropriate changes to Graph Three to show an increase in price to $450 / tonne
identify on Graph Three the new quantity of wheat (Q1) the wheat grower will produce
following the price rise
use marginal analysis to explain the change in quantity after the price rise
fully explain how the wheat market will react in the long run to a price of $450 / tonne.
The lines for Question Four (d) continue on page 12 ➤
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QUESTION
NUMBER
Extra space if required.
Write the question number(s) if applicable.
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QUESTION
NUMBER
Extra space if required.
Write the question number(s) if applicable.
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90629