Econs essay

Question 1

Shut down conditions

Answer 1

May not shut down if the average revenue is higher than average variable costs
-SR: firms will not shut down if the average revenue of each unit of output sold is greater than the average variable costs at the profit maximizing output as they make less losses by staying in production
-this is because fixed costs have to be paid regardless of whether the firm shuts down or not and hence should not be considered. Since each unit of output adds more to revenue than it costs in terms of variable inputs, the difference can be used to pay for part of the fixed costs that do not vary with output. Hence by not shutting down, the firm makes less subnormal profit.

Firms who make subnormal profits may shut down if the average revenue is equal to or lower than average variable costs.
-more likely to happen in firms that sell luxury goods/labour intensive services
-firm should shut down since each unit of output will lead to the firm to incur greater losses on top of already having to incur the fixed cost
-if the firm shuts down they will only have to incur the total fixed costs, which minimizes their losses

LR: Firm will shut down as long as they are making subnormal profits SHUT DOWN
-all costs incurred by any firm eventually become variable costs as there are no fixed factors of production in the long run
-ATC=AVC
-if AR<ATC, firm should shut down and move to other industries as it is making subnormal profit

Question 2

Desirability of market dominance & Undesirability

Answer 2

Undesirability:
1. Allocative inefficiency
2. X- inefficiency/Dynamic inefficiency

Desirability:
1. EOS -> consumer surplus
2. Avoiding duplication of resources
3. Dynamic efficiency

Question 3

Price ceiling method

Answer 3

Implemented on markets for goods that the government deems are necessities and they believe the price of the good is too high

Question 4

Limitations of price ceiling

Answer 4

1. shortage which might lead to the emergence of a black market
2. decrease in quality of goods sold
3. DWL

Question 5

Price floor method

Answer 5

usually implemented when the government deems that goods are being sold in an unfair market with too low of a price and thus the price floor will assist in ensuring that producers are able to survive in the market

++ increased productivity for workers

Question 6

Limitations of price floor

Answer 6

1. surplus in the market-less people enjoy the good
2. worsen gov budget
3. higher COP

Question 7

Method of subsidy (DDSS)

Answer 7

used to promote production of a necessity to promote equity

Question 8

Limitations of subsidy (DDSS)

Answer 8

1. effectiveness in increasing quantity depends of PED
2. worsens gov budget and incurs opportunity cost
3. reduces incentive for producers to be efficient

Question 9

Tax method (DDSS)

Answer 9

decrease production/generate gov revenue

Question 10

Tax limitations

Answer 10

1. Effectiveness in decrease quantity depends on PED
2. creates greater inequity

Question 11

Direct provision

Answer 11

government takes over the market, undertaking entire production
-supply curve becomes perfectly inelastic

Question 12

Advantage and limitation of direct provision

Answer 12

Advantage: equity

Limitations: Imperfect information , inefficiency

Question 13

Subsidies (MF)

Answer 13

Lowers COP-> fall in MPC

Question 14

Advantage and Limitation of subsidy

Answer 14

Advantage: Easy implementation, little resistance from citizens, equity

Limitation: Budget/Trade-off, Imperfect information, inefficiency

Question 15

Taxation (MF)

Answer 15

Increases COP, rise in MPC

Question 16

Advantage and limitation of Taxation

Answer 16

Advantage: Government revenue

Limitation: Resistance, worsening equity

Question 17

Limitations of Public Education

Answer 17

1. Root cause of the problem
2. Depends on the receptivity of consumers
3. Time and cost