tutor 2 review

Question 1

The term the prinicapla agent problem?

Answer 1

The principal agent problem exists when the owners
of a business hand over the control of the day to day running of that business to mangers and the two parties objectives may not be alined.

Question 2

What is the problem with the princap agent problem A03?

Answer 2

The owners need to make sure that the mangers work in accordance with their wishes this is often a problem for large shareholders owned business.

Question 3

Explain one advantage to the firms involved of a goziontal integration between two commercial banks?

Answer 3

One advantage of horizontal integration for commercial banks is that it may help the merged business to achieve greater economic of scale in investing in software for checking the creditwroithniess of customers taking out loans reducing their unit cots.
A second advantage is that it increases the merged firms market power in providing services such as offering savings accounts or mortgages as the merger has reduced the amount of competition between banks which can lead to higher profits.

Question 4

Outline two constraints on business growth?

Answer 4

One constraint may be the overall size of the market
A second constraint may be access to the amount of finance needed to grow a business

Question 5

One reason why firms may wish to maximise their revenue rather than their profit is

Answer 5

to ensure it remains competitively priced in a highly comeptive market

Question 5

One reason why firms may wish to maximise their revenue rather than their profit is

Answer 5

to ensure it remains competitively priced in a highly comeptive market

Question 6

In the long run firms in perfect conception are:

Answer 6

allocatovely and productively effiecnet but dynamically inefficient.

Question 7

In the long run monopolistic competition is?

Answer 7

Inefficient in every way and earning normal profits only

Question 8

Explain why a firm cannot achieve internal economics of scale in the short run?

Answer 8

In the short run at least one factor of production is fixed. Short run average cost curve relates to a separate stage or phase of expansion. Whilst some small cost savings may be viable from increasing output in the short run the savings will soon disappear and costs will rise again because of the fixed factor of production which causes demising marginal return. To achieve economics of scale all factors of production must be variable allowing the expansion of cpaiatcy to continue without facing the problem of demising marginal returns

Question 9

Explain how the coconut of demising marginal productivity explains the shape of the marginal cost curve?

Answer 9

The law of demising marginal returns states that employing an additional factor of production will evuatually cause a relatively smaller increase in output. This occurs only in the short run when at least one factor of production is fixed and so increasing a variable factor will result in the extra workers getting in each others way reducing productivity. Hence the short run cost curve at first falls as increasing marginal returns are enjoyed but then there comes a point when the increased variable factor results in rising cost because productibvt is hampered.

Question 10

Explaiun why the average revenue curve for a perfectly conpetibve firm is perfectly elastic?

Answer 10

The average revenue curve is the price that the price taking perfectly competitive firm, charges. As the firm is tiny compared to the overall output of the market, the firm cannot influence the market price in any way. It can choose to sell as much as it likes at the going market price but finds there is no market for its homogenous output at a higher price

Question 11

Explain why Ahmed can charge a higher price for his specialised coffee than the newsagent coffee machine cup?

Answer 11

Ahmed has differeneityed his coffee by using different indgredients and has convoked successfully customers that his coffee is worth twice the price. There is some noticeable product differ nation in the coffee market. He may have created some string brand loyalty through redoing the price elastic of demand for his coffee and allowing a higher price to be charged

Question 12

Explain why economic theory suggests that a monopoly firm will create a deadweight loss of welfare?

Answer 12

A monopoly operates at the profit maxisming output level where MC=MR at this output price A is charged however if the firm was allocatively efficient producing the exact amount desired by consumers at the market price to would produce output J and charge price B the monopolist has under supplied the market creating a loss of the welfare to society.

Question 13

The conditions necessary for their degree price discrimination in a market include

Answer 13

Differing price elasticies of demand, separation of markets and market power

Question 14

What do natural monopolies always have to do?

Answer 14

Require enormous investment expenditure to maintain their networks

Question 15

Using the concept of price control explain how often ensure uk electricity and gas companies act in the conumser interest?

Answer 15

Ulity companies face price inelastic demand and as sole supplier they can exploit their market power and raise prices for consumers. Price controls can be set by indrusty regulators effectively placing a maximum price for the output thus increasing the amount of consumer surplus available.

Question 16

Outline one factor that can cause a firm to have significant monopsony power?

Answer 16

Also being a monopoly supplier
Having control of the inputs
Price inelastic demand for the final product
Price inelastic supply

Question 17

Using the concept of monospont power explain two benefits to uk car hire consumers using enterprise cars?

Answer 17

Are likely to have lower costs due to the monopsony power it holds in terms of buying cars and may pass on these cost savings to consumers in the form of lower prices on car rental
Paying less for its inputs may mean enterprise has higher levels of supernormal profit which may be reinvested win newer safter cars for hirers

Question 18

Why might a monopsony power be justifiable?

Answer 18

Extra profit might be used to find capital investment and research and development

Question 19

Hit and run competition?

Answer 19

Hit and run competition is a feature of contestable markets. If a particular market seems to be earning supernormal profits for producers perhaps due to an increaseing demand as a result of fashion then new entrants may easily enter the market compete away the supernormal profit and then leave the market altogether when the price falls and the fashion trend ends

Question 20

Explain what is meant by a contestable market 4 markers ?

Answer 20

A contestable market is one that has very low barriers to entry and exit and new firms can easily access any technology required such as the use of a website or a shop front. There is often low consumer loyalty so it easy for new firms to join the market and to operate successfully.

Question 21

Which of the following best describes a situation of regulatory capture ?

Answer 21

Continual and unnecessary delays in a CMA market investigation

Question 22

Explain how the government uses public sector wage setting in the labour market to slow down earnings in the wider economy?

Answer 22

The government has long used public sector pay as an indicator for pay levels generally in the economy. By capping public sector pay private sector workers are thought to have less reason to demand large pay rises thus restarting pay raises across the labour market.

Question 23

Occupational immobility occurs when multiple choice one?

Answer 23

Barries to the mobility of factors of production exists

Question 24

A potential benefit resulting from a merger between Alstom and Siemens could be?

Answer 24

Postive externaliies in the form of jobs creation and less congestion on roads

Question 25

Using the information expiation why the CMA have investigated the booking market ?

Answer 25

The hotel booking and price comparison websites were manipulating the information they had on the number of bookings and type of bookings in order to exploit consumers and risk them into making bookings. Consumers have trended to trust price comparisons websites and all of these firms marketed their sites very heavily. This is because asymmetric information exits between the two partners an d this was causing market failure in that consumers were rushed into making bookings and therefore over consuming the market.