Economics Paper 2, Nov/Dec. 2015

Question 1

The table below represents the cost schedule of a firm in a perfect market.

Output	Total Cost (TC) $	Average Cost (AC) $	Marginal Cost (MC) $
1	8	8	------
2	14	U	X
3	S	6	4
4	20	V	Y
5	T	6	Z
6	48	W	18

Use the table above to answer the questions that follow.
(a) Calculate the values of S, T, U, V, W, X, Y and Z.
(b) If the price of the firm’s product $ 10, what is the firm’s profit when:
(i)         1 unit is sold;
(ii)        4 units are sold?
(c) (i)         At what output level is the firm in equilibrium?
(ii)        Give a reason for your answer in 1 (c)(i)

Observation

This was one of the data response questions and it attracted many candidates who performed fairly above average. The question required the candidates to calculate the total cost, average cost and marginal cost of a hypothetical firm at various output levels, the profit or loss when different units of output are sold and the equilibrium level of output of the firm. Most of the candidates could state the formulae and were able to fill the correct answers but did not show how their answers were derived in the (a) part of the question and could not determine the equilibrium level of output in the (c) part of the question .This prevented them from obtaining the maximum mark.
The candidates were expected to provide the following answers to score higher marks.

(a)        TC       =          AC x Q
S          =          $ 6 x 3
=          $ 18

T = $ 6 x 5
= $ 30

                        AC      =          TC
Q
U        =          $14
2
=          $7

                        V         =          $20
4
=          $ 5
W            =          $ 48
6
=          $ 8

                        X         =          ∆ TC
∆ Q
=          $14 - $8
2 -1
=          $ 6

                        Y         =          $ 20 - $ 18
4 -3
=          $ 2

Z          =          $ 30 - $ 20
5 – 4
=          $ 10
(b)        Profit   =          Total revenue - Total cost
=          TR - TC
TR       =          Price x Quantity
(i)         When 1 unit is sold
Profit   =          ($ 10 x 1) - $ 8
=          $ 10 - $ 8
=          $ 2
(ii)        When 4 units are sold
Profit   =          ($ 10 x 4) - $ 20
=          $ 40 - $ 20
=          $ 20

(ci)       (i)         The firm is in equilibrium at output level 5

(ii) At output level 5, MC = MR = P

P = $ 10, MR = $ 10 and MC =$ 10 at output level 5