Assignment 5

The assignment is due December 6.

A) Short Answer Part

1) Assume you are head of an agency that has the duty to keep markets competitive in your country.
And your agency is using HHI as the variable to measure market concentration. Write a strategy your
agency can use to keep market concentration in the economy low. Explain your answer.

2) Assume in agricultural sector of Zambia, the average fixed costs are higher for each production
level, compared with aggricultural sector of Paraguay, while in Paraguay the average variable costs
for each production level higher, compared with Paraguay. Compare the price level of the shutdown
point in these two countries.

3) Write a condition of the perfectly competitive market. Do you think the condition you choose in
general is met in an average sector in the economy of TRNC, Turkey or the country you come from.
Explain your answer.

4) Assume Figure 9.5 presentes the cost structure of a company. Show the profit/loss leves for prices
PH, PM and PL on the graph. You can use recreate the graph if necessary. (which you can do by
copying and pasting, in case you are using software) Make sure you specify where the area you show
represents loss or profit.

5) Within the perfect competition model the short run supply curve for a company is Marginal Cost
Curve above the AVC. How can it be proven that this is the case? (Don’t forget to prove also “above
the AVC part.”)

6) Coronavirus has significantly affected the demand faced in different sectors. During the crises,
some companies remained open 0even though they were making loss while others are shut down.
Assuming the cost structure of the companies remain the same. Show on a graph how cost and
revenue structure of a company that is making profit before the Corona Crises, will look like. Your
graph should have MC, MR, AVC, SRATC Curves. Draw the same graph for a company that would
choose to remain open according to perfect competition model, and than another version of the
graph for a company, that according to perfect competition model will choose to shut down.

7) How does a market with perfect competition, where intitially companies are making profits, when
all costs are taken into account, will return to equilibrium point in the long run?
8) Describe what opportunity cost is and one of the possible way it is used in economics. (Hint: We
have used it in previous two chapters, you can look to those chapters. However alternative uses you
can think off are prefectly OK, as long as they are consistence with definition of Opportunity Cost and
interests of Economics as a Social Science.)

9) Some economists think that keeping the economy competitive is not good for the economy,
especially when large scale production can decrease the production costs. While other economists
argue, monopoly power may end competition and slow down the innovations. What do you think?
Relate your opinion to one of the models we have seen.

10) How does the long run supply curve in a perfectly competitive market look like? What is the
economic justification behind the shape? Explain your answer.

B) Analytical Part

Question 1

Assume in there are 20 Halloumi Cheese producers in TRNC. Assume each of first 15 of them have
2% share while the remaining 5 have 14% share.

a) Calculate HHI for halloumi cheese in TRNC.

b) What will happen to HHI if a new company, Kıbhas would buy the 15 companies, with 2% market
share?

c) What will happen to HHI if Kıbhas keeps the share it got in part b, and the remaining 5 companies
merge in to two companies, with equal share?

Question 2

Assume the cost structure shown on the graph below represents the monthly cost structure of bus
factory. And the costs are expressed in million dollars. Assume bus market is perfectly competitive.
Assume a fixed cost between 10 and 100 million dollars.

Number of Marginal Average Variable Cost

Buses Cost
1 20 20
2 17.5 18.75
3 15 17.5
4 12.5 16.25
5 10 15
6 12.5 14.58333333
7 15 14.64285714
8 17.5 15
9 20 15.55555556
10 22.5 16.25
11 25 17.04545455
12 27.5 17.91666667
13 30 18.84615385
14 32.5 19.82142857
15 35 20.83333333
a) Draw the MC, AVC, SRATC for the factory. Draw AR curve and show the optimum production
level, and profit or loss level for the price levels 5 price levels you choose. Make sure at least
for two prices you choose the company makes profit, and for two price levels it makes loss.
b) Calculate the profit and loss levels for the prices you choose.