Economics Paper 2, May/June 2012
 Questions: 1 2 3 4 5 6 7 8 9 10 11 12 Main
Weakness/Remedies
Strength

QUESTION 1

The diagram below represents the cost and revenue situation of a firm. Use the information in the diagram to answer the questions that follow:

Cost/Revenue

OUTPUT/SALES

MC        AC

AR3=MR3

AR1=MR1

Q 1

Q 1

Q 3

Q 2

P1

O

P2

P3

AR2=MR2

(a)        Why would the firm not produce at

(i)         Q1:

1. Q3?

(b)        How much profit does the firm make at P2?

(c)        If price falls to P1

(i)         What quantity would the firm produce?

1. What type of profit does the firm make?

(d)       In which type of market is the firm operating?

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This question attracted very few candidates who performed below average. The question required the candidates to interpret the graph and carry out some further analysis in order to answer the question appropriately. Most of the candidates however fell short of this expectation.  This made them to score low marks.  Candidates were expected to answer thus:

(a)        (i)         The firm would not produce at Q1 because at Q1 the firm makes only
normal Profit but the aim is to maximize profit.

1. The firm would not produce at Q3 because at Q3 marginal cost

(MC) would be greater than MR2 since P2 and Q2 are the equilibrium
price and quantity respectively.

(b)        At P2, the total profit is the profit per unit, EB, multiplied by the quantity OQ2 or
P2 E.

Total profit therefore is EB x OQ2 or P2 E.

(c)        (i)         If price falls to P1, the firm would produce Q1.
(ii)        The firm would make just normal profit.
(iii)       Normal profit is included in the average cost of the firm.
When price or average revenue is equal to average cost,
then, it is only normal profit that is earned.

(d)       A perfectly competitive market.

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