Assignment 1: Costs
SECTION A
1. The diagram shows the total cost function for a company producing mobile phones:
Calculate average fixed cost for this firm at an output of 1000 units.
[3]
2. A firm is experiencing a fall in short-run average total costs as output rises. Which of
the following must be true?
[1]
A Marginal costs are falling
B Marginal costs are rising
C Marginal costs are above average total costs
D Marginal costs are below average total costs
E There are economies of scale
3. Which of the following best explains the shape of the short-run marginal cost curve
between X and Y?
[1]
A The law of diminishing marginal returns
B The law of increasing marginal product
C Average costs are rising
D Average variable costs are rising
E Economies of scale
4. Explain what is meant by the term ‘law of diminishing returns’.
[3]
5. A mobile phone company finds that its total costs are best illustrated by the following
curve:
Examine closely the range of output AB.
a) What is happening to average costs over this range? Explain your answer.
[2]
b) What is happening to marginal costs over this range? Explain your answer.
[2]
Assignment 2: Revenues
SECTION A
1. A light aircraft manufacturer finds that by lowering the price of its planes from £1.2
million to £1.1 million each, annual sales increase from four to five. Calculate the
marginal revenue gained from the sale of one extra plane for this firm.
[3]
2. The diagram shows a firm’s total revenue as output increases.
Panel
A
Reven
ue
Panel
B
Output per
month
Draw average revenue and marginal revenue for this firm. Use Panel B to draw your
answer.
[2]
3. A pizza restaurant faces the following demand curve (D):
Panel
A
Total
reven
ue
Panel
B
Quantity of pizzas per
week
a) Annotate Panel A to show marginal revenue for this firm.
[2]
b) Annotate Panel B to show total revenue for this firm.
[2]
c) Calculate the total revenue made by the firm at the revenue maximising level of
output.
[2]
Assignment 3: Motives of the firm & Shut-Down Point
SECTION A
1. Smartphone manufacturer Blackberry made a loss of $670 million in the three months
to the end of May 2016, down from a $73 million profit a year earlier, however
continued to operate.
a) Explain one condition under which loss-making firms might continue to operate
in the short-run.
[4]
b) If Blackberry is currently a profit-maximising firm but changes its objective to
sales maximisation, it can be deduced that Rio Tinto will move from setting
prices at which:
[1]
A marginal revenue equals zero to where marginal revenue equals marginal
costs
B marginal revenue equals marginal costs to where marginal revenue equals
zero
C marginal revenue equals marginal costs to where average revenue equals
average costs
D average revenue equals average costs to where marginal revenue equals
marginal costs
2. Cherry runs a tanning shop and the following table shows her costs and revenues in a
fixed time period when she changes her prices for a treatment. Some parts of the table
are left blank for your own calculations.
Calculate the price range over which Cherry would achieve profit maximisation.
[3]
3. A firm with monopoly power decreases the price of its product and sells up to the
output at which it just earns normal profit.
a) Which of the following is the best description of the firm’s objective?
[1]
A Profit maximisation in the short run
B Revenue maximisation in the long run
C Sales maximisation
D Loss minimisation
b) State one reason why the firm may have chosen to take this action.
[1]
4. Lizzie runs a hairdressing shop and the following table shows her costs and revenues in
a fixed time period when she changes her prices for a haircut. Some parts of the table
are left blank for your own calculations.
At what range of output would Lizzie achieve profit maximisation? Show your working.
[3]
5. German energy firm [Link] has said its annual net losses more than doubled in 2015 to
€7bn (£5.4bn). Under which one of the following conditions are firms such as this likely
to keep operating?
[1]
A The market is highly contestable
B They are covering average variable costs in the short run
C Total revenue is less than total cost in the long run
D They are covering marginal costs in the short run
E There are low sunk costs in the industry
6. Explain what is meant by the term ‘satisficing behaviour’.
[3]
7. The diagram shows the costs and revenues for a profit maximising firm in a market.
a) The most likely outcome for the firm, assuming no change in costs or demand, is
to
A continue in business and make supernormal profit ZYWX
B continue in business and raise the price
C continue in business and cut the price
D continue in business in the short run but shut down in the long run
E shut down immediately
[1]
b) Explain your answer to part (a).
[3]
SECTION B
Camera retailing
Extract 1 Peter Jones reopens Jessops
Jessops, the photography retailer, made a surprise return to the high street in March 2013
when Peter Jones, one of Britain’s best-known entrepreneurs on the BBC programme Dragons’
Den, relaunched the chain 11 weeks after it collapsed. Jessops, which was founded in
Leicester in 1935, reached shut-down point in January 2013. Jessops suffered both from
consumers’ shift to buying cameras on the internet and their increased reliance on cameras
built into mobile phones. Mr Jones became Chief Executive of Jessops after buying the firm
from its administrators PricewaterhouseCoopers. Mr Jones made his money from the telecoms
industry and operates some stores for Vodafone and has online retail investments. He has
invested £4 million in Jessops and will reopen around 40 shops, far fewer than the 187 shops
the retailer had before.
“Britain’s high street is fighting back,” Mr Jones said as he reopened a refurbished flagship
Oxford Street store, adding that shops could compete with online traders if prices are
competitive. “Who would not want to buy a camera from expert and enthusiastic staff?” he
said. Stores will feature areas to try out products before buying. Customers will be able to
create photo albums and take photography courses through the Jessops Academy. Staff will
also turn photos into calendars and posters while you wait. Mr Jones said companies such as
Apple had proved that customers would spend time and money in a welcoming environment
with quality staff in busy locations. “It is very Apple-ish. We have learnt from other retailers, I
believe Jessops is an iconic British brand which can lead the retail resurgence on Britain’s high
streets, powered by new innovations and world-leading, expert staff” he said. “Image is
everything and, even in the mobile and tablet era, there’s no substitute for a quality camera
when it comes to taking the perfect picture.”
Mr Jones has reduced fixed costs from £8 million to £1.5 million by cutting administration
costs, closing stores and further rationalisation. Jessops will have outlets in centres such as
London, Birmingham, Manchester and St Albans, with six opening immediately. Jessops will
hire as many as 500 staff and many are drawn from the 1 400 who lost their jobs when it
collapsed. “A lot contacted me on Twitter and asked for a job and it’s great to have them,”
said Mr Jones.
Prices will be matched to those of [Link] and Mr Jones said it would be “competitive”
with other online retailers such as Amazon. “We will make our profit margin on the
accessories,” he said. He said “click and collect” would be a powerful driver of sales and
Jessops promised greater integration with its online presence, including an option to collect
internet orders at store. “I think Amazon will start to lose their market share because they do
not have a collect at store. Nobody likes waiting in for a delivery.”
Mr Jones forecasts sales of more than £80 million in his first year and expects to take some
15% of the digital single lens reflex camera market in the UK. Revenue before Jessops shut
was £304.6 million, but the firm is said to have made a loss of £12 million in the fifteen
months up to its closure.
More than 10 000 jobs have been lost in retail this year as chains such as HMV and Republic
have fallen into administration. However, Mr Jones is not the only person to see potential in
the high street despite flat retail sales. Sports Direct bought fashion chain Republic while
Gordon Brothers Europe, the private equity firm, this week bought Blockbuster UK, the
entertainment group, out of administration and will keep half its 528 stores open, claiming it
can “bring new life” to them.
1. Using examples from the data, explain what is meant by a ‘shut-down point’ (Extract 1,
line 4).
[5]
2. Using the data in Extract 1 and an appropriate diagram, discuss why Jessops was
making a loss before it went into administration. (JUST A DETAILED PLAN)
[10]
Assignment 5 – Perfect Competition
SECTION A
1. The diagram below illustrates a firm operating under conditions of perfect competition
in the short run.
a) State three characteristics of perfect competition.
[3]
b) Annotate the diagram to how the industry will change as it reaches the long run.
[2]
2. A firm selling microchips is operating under conditions of perfect competition. The
market price is below the firm’s average variable costs. The immediate response of this
firm will be to
[1]
A raise its price
B shut down
C reduce output and cut its price
D keep its price and output unchanged
E cut its price and increase output
3. A firm operating under conditions of perfect competition is making supernormal profits.
Assuming all else is constant, explain the likely impact on this firm’s output and price in
the long run. Illustrate your answer with an appropriate diagram.
[4]
4. A large number of small bakeries in a competitive industry are taken over and
combined to form a single monopoly supplier. Assuming constant average costs,
explain the likely impact on price and output. Illustrate your answer with an appropriate
diagram.
[4]
5. Firms are leaving a perfectly competitive industry. This suggests that for these firms:
[1]
A average revenue exceeds marginal revenue
B marginal revenue exceeds average revenue
C average fixed cost exceeds average revenue
D average variable cost exceeds average revenue
E average costs equal average revenue
6. Supernormal profits being made by a perfectly competitive firm in the short run would
disappear in the long run because of
[1]
A freedom of entry into this market
B firms engaging in large scale advertising
C differentiated goods
D allocative inefficiencies
E high sunk costs