AS91400 Demonstrate understanding of the efficiency of different market structures using marginal analysis (2021)

Question 1

Question 1.a

On Graph One, below:

label the price (Pmc) and quantity (Qmc) if the natural monopolist is operating with a marginal cost pricing regulation set by the Government
shade and label the type of economic profit that would be earned by the natural monopolist with a marginal cost pricing regulation set by the Government
shade and label the consumer surplus if the natural monopolist is operating with a marginal cost pricing regulation set by the Government

Question 1.b

Using marginal analysis, explain why the natural monopolist would not operate at a price of Pmc and quantity of Qmc if there was no pricing regulation set by the Government.

Question 1.c

Label the profit maximising price (P2) and quantity (Q2) if the monopolist was not operating with a marginal cost pricing regulation or any other pricing regulation.

Question 1.d

Compare and contrast the impacts of a marginal cost pricing regulation on consumers, the natural monopolist, the Government, and allocative efficiency. Refer to Graph One, and explain:

Question 1.d.i

How does marginal cost pricing impact consumer surplus and the economic profit earned by the natural monopolist?

Question 1.d.ii

How does marginal cost pricing impact the Government and allocative efficiency?

Question 2

An individual firm earning a short-run supernormal profit is in a perfectly competitive market structure.

Question 2.a

Question 2.a.i

On Graph Two, below, show how the market will react to the supernormal profit in the long run. Label any curve shifts and changes in the market equilibrium price (P2) and quantity (Q2).

Question 2.a.ii

On Graph Three, below right, show how the long-run change in the market will affect the long-run profit-maximising equilibrium for the individual firm. Label any curve shifts and changes in the profit-maximising price (Plr) and quantity (Qlr).

Question 2.b

On Graph Four, below, label the long-run profit-maximising price (P4) and quantity (Q4) for the monopolist.

Question 2.c

Compare and contrast the allocative efficiency and long-run profits of the perfect competition and monopoly market structures. Refer to all three graphs on page 4, the characteristics of each market structure, and explain:

why perfect competition is an allocatively efficient market structure
why a monopoly is an allocatively inefficient market structure
any changes in the long-run profit for the individual firm, and the monopolist

Question 3

Question 3.a

On Graph Five, below, show the impact (if any) on the short-run price and output if there is an increase in fixed costs for the perfectly competitive firm. Label any curve shifts and changes in the profit-maximising price and quantity.

Question 3.b

On Graph Six, below, show the impact (if any) on the short-run price and output if there is an increase in variable costs for the perfectly competitive firm. Label any curve shifts and changes in the profit-maximising price and quantity.

Question 3.c

Use marginal analysis to compare and contrast the impacts of increased fixed costs with the impact of increased variable costs for a perfectly competitive firm. Refer to both graphs and the characteristics of perfect competition, and:

use examples to explain the difference between fixed and variable costs
explain the impact of increased fixed costs and increased variable costs on the short-run price and output levels of a perfectly competitive firm.