Economics Paper 2, Nov/Dec. 2021

Question 1

Table 1 below represents the cost and revenue positions of a firm producing roofing sheets. Study the table and answer the questions that follow.
Table 1

Output (kg)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)
10 20 30 40 50 60 70	150 300 420 520 600 660 690	- 15 12 10 I 6 3	250 300 J 350 430 530 680	- 5 2 3 8 K 15

(a)        Compute the values of I, J and K.
(b)        What is the equilibrium output level of the firm? Explain your answer.
(c)        Calculate the profit or loss at the equilibrium output level.
(d)       Is it economical for the firm to produce beyond 50 kg? Explain your answer.
(e)        In what market structure is the firm operating? Explain your answer.

Observation

This is one of the data response questions and most of the candidates who attempted it scored below average marks. The question required the candidates to calculate the values of I, J and K in the (a) part, determine the equilibrium output level of the firm and give a reason for the answer provided in the (b) part, calculate the profit or loss at the equilibrium output level in the (c) part of the question, determine if it is economical for the firm to produce beyond 50 kg and give an explanation for the answer in the (d) part of the question and identify the market structure in which the firm is operating in the (e) part of the question. Most of the candidates who attempted this question were unable to calculate the values of I, J and K in the (a) part, few of them were able to determine the equilibrium output level of the firm in the (b) part. Many of the candidates were unable to calculate the profit or loss at the equilibrium output level, determine if it is economical for the firm to produce beyond 50 kg and identify the market structure in which the firm is operating in the (c), (d) and (e) parts of the question respectively; hence they could not obtain the maximum mark.

The candidates were expected to provide the following answers to score higher marks.

(a) I = MR50 =$ 600 -$520 = $80 = $8
50kg - 40kg 10kg

                     J (TC30) = J - $300   = $2
10kg
J – $300 =$ 20
J = $300 +$ 20
J = $320

OR

                     J (TC30) = $350 - J = $3
10kg
$350 - J = $ 30
J = $350 - $30
J = $320

                     J (TC30) = TC20 + MC30
                                 = $300 + $2(10)
= $300 + $20
= $320

K (MC60) = $530 - $430        = $100 = $10
60kg - 50kg          10kg

(b)       The equilibrium output level of the firm is 50kg. At this output level,
MC = MR = $8.

(c)        At output level 50, profit is TR -TC = $600 - $430 = $170.

(d)       It is not economical to produce beyond 50 kg because any extra unit lowers marginal revenue while marginal cost increases.

(e) Monopoly or monopolistic competition.
Because marginal revenue is falling continuously in order to sell more. OR
Price is higher than MR at the equilibrium point e.g. AR50 = TR /output = $600 / 50 = $12˃8