1.(i) Use the Graph below to explain the output, profit, and loss conditions for monopolistically competitive firms. Show your work where appropriate about the Graph.
Shown in the Graph above, for the monopolistic competitive firm to be in equilibrium. The profit is maximized, or loss is minimized when the following conditions are to be satisfied;
MR = MC
The slope of MC > Slope of MR
Therefore;
As indicated in the Graph above. The profit-maximizing output, as well as price, is obtained by the intersection of marginal revenue and marginal cost curve.
The value of profit-maximizing price=20
Output=40
At the intersection
Therefore, Average Total Cost due to the profit-maximizing output and price
=17.5
But we have values of price and quantity.
P = 20
Q = 40
Average Total Cost (ATC) = 17.5
Therefore
Profit = Q * (P – ATC)
Profit = 40 * (20 – 17.5)
Profit = 100
Indicated in the graph the the profit maximizing output and price
Profit maximizing=20
Output=40
ATC=22.5
Therefore
P=20
Q=40
Profit = Q * (P – ATC)
Profit =40*(20-22.5)
=-100
It means that loss=100
(ii) With examples, examine the barriers to business entry for imperfect competition firms.
- structural entry barriers.
For instance, the economy of large scale production.
A market that has been exploited by holders, new firms will be discouraged.
Network effects
When a high number of people consuming the same goods and services, the more top personal benefits. Besides, the secure network is already occurring; it will limit the new introduction of firms because they will not have enough customers.
Control of a scarce essential resource.
It just owns the scares resources so that other firms cannot have access to the scares resource.
The high cost of the firm set up
Mainly they are retrospective costs, which has no regain power when the firm sign out to the market. The high firm set up costs discourage those producers who want to introduce themselves in the market for the first time.
The high cost of research and development
When there is high development, it means sizeable financial reserve for existing firms, therefore for new firms to compete favorably, they should exceed the level of spending compared with existing firms.
- Artificial barriers.
Predatory pricing.
Moreover, businesses can try to lower the price so that to discourage rivals in the sale.
Control pricing.
It’s mainly the existing firm that lay a low price as well as to set high output, due to they don’t want new entrants to make more profits; this is due to selling the commodities below the average total cost. The existing is altering its superior ideas of the market as well as production costs.
Predatory acquisition
Mainly, taking over the market by buying shares so that to gain a controlling interest to reduce the completion.
Switching costs
These are the cost received by costumers when trying to shift the suppliers. Basically, they are the cost of buying new; they are common when switching banks as well as energy suppliers, among others.
Advertising
The more the money spent by the existing firms. The more significant discouragement to the new entrant.
Powerful brand
Its bolts existing customers and discourage entry.
Allegiance schemes
For instance, Tesco’s Club Card, which helps oligopolists to contain customer loyalty and obtain market share.
Exclusive contracts, patents, and licenses
The market which has a license and contract is difficult to make the entry. Furthermore, it helps existing firms from completions. These contracts may be between suppliers and retailers.
- The table below is extracted from the Goodland Republic Bureau of Statistics records for 2016 -2017. Use the information to answer the questions that follow
Examine the status of the economic welfare in the Goodland Republic in 2018 based on your GDP deflator, nominal GDP, and Real GDP. Also, explain the reasons why it is necessary to calculate real GDP. Show your work.
Nominal GDP=sum of all production
Therefore 55,000+98000+45,000+110,000+6,000+145,000+2,300+6,500+850+4,800+450+600+7,500
= 482,000
Base year is production *price per unit
Therefore
2017 NOMINAL GDP =75,000+200,000+1,150,000,000+12,000,000+25,000,000+7,500,000+5000+4800+770+32,000+7500+1625+16,000= $1,194,842,695
2018 production*price=110,000+245,000+1,102,500,000+13,200,000+42,000,000+10,150,000+8050+7,800+1,275+40,800+11,250+2250+18750
=$1,168,295,175 NOMINAL GDP IN 2018
Real GDP 2018=quantity of output in 2018 *price of output in the base year (2017).
=82,500+196,000+1,035,000,000+11,000,000+30,000,000+7,250,000+5,750+5,200+935+31200+6750+1950+17250
=$1,083,597,535
$ 1,168,295,175 tells us that the value Goodland economy output in 2018 based on the prices in 2017. the real GDP IS less Importance than the nominal GDP of the Goodland actual output; it’s because between 2017 and 2018price increases, but production in 2018 reduces in Goodland. Which deflates the GDP figure; it shows that Goodland’s real GDP is smaller than nominal GDP, indicating that the nominal GDP had to inflate to come up with real GDP 2018.
The GDP Deflator= nominal GDP/REAL GDP
=$1,168,295,175/$1,083,597,535
=1.078
=1.078*100
=1078 price index
ANSWR
1078/1,194,842,695=0.0000009*1
=0.0000009
1.0000009-100
=0.0000009%
It shows that the average price of goods in Goodland between 2017 to 2018 increase by 0.0000009% almost constant base the gdp deflator in 2017 is different from the nominal gdp of 2017 means decrease is1078/1,194,842,695=0.0000009*1 then 1.0000009-100=0.0000009% deflation.
The real GDP is the value of a nation’s output of goods and services in an appropriate adjustment for the changes in the prices of products and services from a base year.
Question 3.
3 Examine the fundamental causes of a nation’s business cycle fluctuations. Also, examine the relationship between total spending by government and consumers in a nation—the location of the countries’ GDP on the business cycle.
There are two causes of Business Cycles mainly;
Internal causes of Business Cycles; these internal factors can make changes in the firm sector and its economy
- Changes in Demand
with a change in Demand will cause economic change. With rising in Demand in an economy will leads to high production so that to meet the needs.
The economy will rise when there is more output as well as employment. It will lead to more income and higher profits. Furthermore, excessive will leads to inflation.
- Fluctuations in Investments.
The fluctuation in investments will be illustrated with the following factors; the rate of interest in the economy as well as profit assumptions etc.
Therefore, growth in investment causes a rise in the economy and vice versa.
- Macroeconomic Policies
basically, when the monetary policies are set to promote economic activities of the country, then it will lead to a change in the business cycle that is promoting investment, therefore, increasing the economy. These can be done when there is low taxation by the government.
4] Money supply
If there is a change in the money supply, it will result in the trade cycle. Besides, growth and expansion are led by the boom in money in the market.
However, the excessive money supply will result in inflation and vice versa
External Causes of Business Cycles
Political instability and attacks
In the time of war, people tend to make more weapons and arms; this will lead to economic reduction as all resources are being used in war. Besides, war will result in unemployment as well as a fall in economic activities. However, after the war, there will arise in an economy as there will be the reconstruction of infrastructure.
- technology Shocks
New technologies, for instance, increased employment, investments, as well as high income, will increase the economy of a nation. For example, the introduction of mobile phones boosts the telecom industry.
c.Natural Factors
Natural FACTORs cause more losses to the agricultural sectors, for instance, floods and droughts as they damage crops. Thus resulting in high inflation later decreasing Demand.
The relationship between government total expenditure as well as consumers in a nation. The location of the countries’ GDP on the business cycle.
Private consumption expenditure contributes to 2/3 of gross domestic product (GDP), mainly in first-world nations. However, 1/3contributed mostly by business, government expenditures also contribute to the remaining 1/3 as well as net exports.
Therefore, the country’s income encountered, private consumption expenditure subdivided into 3 largest sectors: expenditures for services, for durable commodities, as well as for nondurable goods.
The relationship between the flow of consumption as economists gains it as well as consumption expenditure as it contributed to national income.
4a. Suppose you have $200,000 in a bank term account. You earn 5% interest per annum from this account.
You anticipate that the inflation rate will be 4% during the year. However, the actual inflation rate for the year is 6%.
Calculate the impact of inflation on the bank term deposit you have and examine the effects of inflation in your city of residence with attention to food and accommodation expenses.
Deposit=$200,000
Interest =5%
Current amount = (200000*0.05)
interest=10,000 annually
real inflation =0.06
inflation= (200000*0.04)
=$8,000
Real inflation=
= (200000*0.06) 1.05/1.04=1.0096
=$12,000 $200000*0.0096=1920
1.06/1.04
1.019
Therefore
$200000*0.019=$3,800
Inflation value =$3,800
Effects of inflation in our city.
Reduces employment
When there is unemployment, there is a reduction in food purchasing and also accommodation. This lowers the economy of the city.
Diminishes purchasing power
There will rise in the price, thus decreasing the purchasing power of food and accommodation.
- The Australian Bureau of Statistics (ABS) reported in May 2017 that the civilian population in Australia over 15 years of age was 20.8 million. Of this population of 20.8 million Australians, 13.5 million were employed, and 0.7 million were unemployed.
Calculate Australia’s labor force and the number of people in the civilian population who were not in the labor force? Also, examples examine the causes of structural unemployment in Australia.
The Australia’s labor force =no. employment /adult population
=13.5/20.8
=0.65*100
=65
Employment ratio=65%
Not in the labor force is 0.7/20.8
=0.03*100
Unemployment ratio is 30
=30%
The causes of structural unemployment.
Completion
The rise in Completions is manly caused by globalization.
Technological changes.
Basically, it will affect the economy. When there is a more advanced technology in the industries, this will lead to unemployment due to employees have not to cope with the new technology
- Use the Aggregate Supply and Aggregate Demand Model below to answer the questions that follow. Aggregate Supply and Aggregate Demand Model
(i) Examine the influence of government expenditure on investment in a nation. Use Jot Inc. Ltd, a multinational construction company in which you are the Chief Exec of the firm that is highly diversified and receives funds to construct highways and other government-funded projects. Also, explain the factors that cause the Aggregate Demand curve to be downward sloping left to right.
Influence of government on expenditure on investment in the nation.
The main agenda is Infrastructure investment. However, it shows that Higher government expenditure on roads can result in removal supply bottlenecks and results in greater efficiency. Besides, it helps to boost long term economic growth. The economic principle that states that when supply exceeds Demand for commodities, then the prices fall.
It illustrates that a rise in taxes has a positive impact on the government; as its expenditures rise. While aggregate Demand remains constant, this can lead to a rise in GDP.
When consumers reduce their spending, it will increase in private sector savings. Therefore, a rise in taxes may not reduce expenditures as usually known.
However, the rise in government expenditure will result in many effects. When the government spends more on investments, it will create employment; thus, consumers will have a high income to use in purchasing commodities, thus high aggregate demand. Furthermore, government expenditure may result in a greater increase in GDP.
When there is unemployment, there will low income; therefore, low aggregate Demand is shown in the Graph above ADD3 and ADD1 as employment increases the demand increase drastically. It shows that at ADD0 government spends a lot in the infrastructure thus low unemployment rate at ADD2 all people are employed means there is income; thus, demand increases.
Some of the factors affecting aggregate Demand;
Government policies
Income
Price
Factors that cause AD to slop downward are;
- The factor of the interest rate.
The decrease in Demand is being caused by a lesser price level. Furthermore, it reduces interest rate equilibrium as well as a rising outlay. Besides, the lesser price level will automatically have led to an increase in interest-sensitive pieces of the purchaser as well as a real product.
Level of wealth
When the level of a price decrease, they will tend to buy more due to cash balances, so people decide to will spend more money on purchasing, resulting from rising in the real product.
Net market abroad effect
When there is A lower price level means, prices for goods produced are less relative to the prices in other countries. Furthermore, one can decide to buy more commodities in a foreign nation. Moreover, increased exportation indicates a component of real GDP.