Final Exam (Take-Home) Spring - 2021

Subject: Microeconomics Submission Day: Wednesday

Instructor: Dr. Amena, Mr. Faisal Submission Date: 26 May 2021
Program: BBA Max. Marks: 15

Question Marks Score Comment (s)

01 05
02 07
03 03
Total 15

Department of Business Administration Please

follow the instructions carefully:
1. YOUR FINAL EXAM IS DIVIDED INTO TWO PARTS i) OBJECTIVES- 25 MARKS AND ii)
SUBJECTIVE- 15 MARKS. YOU HAVE TO ATTEMPT BOTH WITHIN THE DUE DEADLINE.
2. Write your answers in a Word / PDF file and upload the file before the due date on Blackboard.
3. Write your name and registration ID on the first page of your Word / PDF file.
4. Answer scripts can be uploaded on Blackboard any time before its deadline. Therefore, do not wait for
the last hour to avoid any unforeseen problems.
5. Submission of answer copy will be considered acceptable through Blackboard ONLY. Therefore, do not
submit your document through email or any other medium.
6. Use 12 pt. font size and Times New Roman font style along with 1-inch page margins.
7. Follow the requirements of the word limit and the marking criteria while writing your answers.
8. Provide relevant, original and conceptual answers, as this exam aims to test your ability to examine, explain,
modify or develop concepts discussed in class.
 9. Do not copy answers from the internet or other sources. The plagiarism of your answers may be checked
through Turnitin.
10. Recheck your answers before the submission on Blackboard to correct any content or language related errors.
11. Double check your file before uploading it on Blackboard to ensure that you have uploaded the correct file
with your answers.

Question # 1: (05 marks)

a. Complete the following table. (2 Marks)

Units TFC TVC TC AFC AVC AC MC

1 24 0
2 24 28
3 24 54
4 24 75
5 24 96
6 24 126
7 24 168
8 24 214 8 24 264.

b. Draw AFC, AVC, AC, and MC on a graph. (2 marks)

c. Explain the relationship between AC and MC. (1 Marks)

The cost refers to the expense incurred by the firms/producers manufacturing various products. They
usually buy fixed – building and machinery and variable – raw material and labor inputs. The cost can be
explicit (paid to the factors that are hired or purchased) and implicit (cost imputed for inputs that belong
to the producer – like a person managing his own business).
The diagrammatical representation of AFC, AVC, AC, and MC:
 
The relationship between AC and MC:
AC: Cost per unit of output
MC: Cost of manufacturing one extra unit

 Both curves are U shaped as the law of variable proportion operates, which implies as more and
more variable factors like labor are employed to manufacture a product, will lead to a rise in the
total production (TP) up to some extent, but not always. After a specific unit of labor is being
employed the TP will start falling. As the consequence, the MC and AC will first decline
(increasing returns to labor) and after reaching a minimum level starts rising (decreasing returns
to labor).
 The MC will cut AC from below at its minimum point. This will happen when the cost = 30 and 5
units of L is being employed.
 When MC < AC, then AC is moving downward.
 When MC > AC, then AC will start moving upwards (rising).
Question # 2: (07 Marks)

MonoMed, having a Patent on production of a medicine, has following Demand and CostSchedule:
Price (Rs ): 12 11 10 9 8 7 6 5 4 3
Quantity 0 1 2 3 4 5 6 7 8 9
TVC ( Rs ) 0 13 16 20 25 31 38 46 56 68
Where Fixed Cost is Rs 5
A) In a Table calculate TR, MR, TC, AVC, ATC and MC at each price.
B) Plot the Demand, Marginal Revenue MR, Average Total Cost ATC, Average Variable
Cost AVC and Marginal Cost MC Curves of the Firm in a clearly labelled graph.
C) Calculate the profit earned, if any and show the area on the firm’s graph.
D) How would you define the market structure of MonoMed? What are the characteristics?
Does the firm have pricing power?
E) What will be the impact of the firm on societal welfare? Would there be welfare loss as
compared to a competitive firm? If so, briefly explain. Support your answer using MonoMed’s
graph in (b) above

Question # 3
Answer the following questions. (Explain graphically and assume all necessary figures to support
your answer where necessary) (03marks)

I. If firms in a competitive industry incur an economic profit, what happens to supply, price,
output, and economic profit in the long run? Explain (1 marks)
If firms earn economic loss, some of them will exit the market. This will decrease
market supply, shifting market supply curve to left. As a result, market price will
increase and market quantity will decrease.

Since firms equate market price with their own MC, higher market price will
increase firm output. 
Higher price and higher output will decrease the economic loss, and this process
will continue until each firm is incurring zero economic loss (and zero economic
profit) in the long run.
For example, we consider the fast food industry. During the COVID pandemic-
induced recession, fast food industry has incurred severe loss, causing firms to
incur losses. As a result, many restaurants which could not afford to stay in
business and pay the fixed costs, had exited the market. This has decreased
market supply, thus increasing price. This situation will prevail until the New
Normal long run equilibrium is restored.

II. What is the relationship between the marginal revenue curve and the demand curve for a
single-price monopolist? (2 marks)

Monopoly refers to the market structure where there is only one firm in the
industry. There is a barrier to entry die to different reasons such as required hue
capital, license etc.
All the demand is met by the single  firm in the monopoly. Since the firm and
industry are same in monopoly firm the demand curve fo the monopoly firm is th
demand curve of firm.