BAHRIA UNIVERSITY (KARACHI CAMPUS)

Final Assessment Assignment Spring, 2020

Course Code/Title: ECO-110/ Microeconomics Class: BBA-1A, B, C, D, E, F, G, H

Course Instructor: Dr. Khurram, Tehseen, Rabia, Aliya Marks: 50
Assignment uploaded Date and Time by the Teacher: 30th June, 2020 by 0800 AM
Assignment Completion/Uploaded Date and Time by the Student: 30th June, 2020 by 0400 PM

Student’s Name: ____________________ Reg. No: __________________

Assignment Guidelines by the Teacher

▪ Assignment Submission: Manuscript / Computer Typed / Optional

▪ Caution: Plagiarism and sharing-similarity comes under use of unfair means, if
found in response assignment by the students, it shall be dealt with in accordance
with BU examination rules.

Q 1. When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that
the cartel could stay together over the long term—that the incentives for individual members to cheat would
become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able
to beat the odds and continue to collude? [4
Marks]

Q 2. Mary and Raj are the only two growers who provide organically grown corn to a local grocery store.
They know that if they cooperated and produced less corn, they could raise the price of the corn. If they
work independently, they will each earn $100. If they decide to work together and both lower their output,
they can each earn $150. If one person lowers output and the other does not, the person who lowers output
will earn $0 and the other person will capture the entire market and will earn $200.
Now you are required to answer the below questions: [8 Marks]
a. Find out the payoff matrix between Raj and Mary? (A = Work independently; B =
Cooperate and Lower Output.)
b. What is the best choice for Raj if he is sure that Mary will cooperate?
c. If Mary thinks Raj will cheat, what should Mary do and why?
d. What is the prisoner’s dilemma result?
e. What is the preferred choice if they could ensure cooperation?
f. Identify the Nash equilibrium of the game, if it exists.

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Q 3. Evaluate the following statements whether they are true or false. Justify your answer with an
appropriate reason. (Draw a graph if it is necessary). [12 Marks]
a) The long run equilibrium condition for the competitive firm is P = LRAC = MR = MC.
b) If the total cost function is given by TC = 10,000 +10Q +85 Q2, the associated total
fixed cost and total variable functions are given by: TFC = 10,000 and TVC =10Q +85
Q2 respectively.
c) A monopolistically competitive firm cannot successfully maintain positive economic
profits in the long-run
d) Under kinked demand theory the prices of oligopolists are predicted to be rather rigid
or 'sticky'.
e) A firm not having the ability to influence the price of its goods and services and having
to accept the equilibrium price in the market of that good is a price taker.
f) For a monopoly producing a certain amount of output, price is less than marginal
revenue.
Q 4. Explain the conditions that are met when a consumer has found the best affordable combination
of goods to buy. (Use the terms Budget line, Marginal Rate of Substitution and Relative Price in your
Explanation) Also graphically illustrate the best affordable combination.
[4 Marks]

Q 5. The figure represents the cost and revenue structure of a firm in monopoly situation. Using the
information provided in the figure answer the following questions:
[8 Marks]

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 a) If the industry is perfectly competitive, what will be the total quantity produced? At what
price?
b) Which area reflects consumer surplus under perfect competition?
c) If the industry is a single-price monopoly, what quantity will the monopolist produce?
Which price will it charge?
d) Which area reflects the single-price monopolist’s profit?
e) Which area reflects consumer surplus under single-price monopoly?
f) Which area reflects the deadweight loss to society from single-price monopoly?
g) If the monopolist can price-discriminate perfectly, what quantity will the perfectly price-
discriminating monopolist produce?

Q 6. Your accountant has quit suddenly because he won the California lottery. You are left with an
incomplete summary of last month’s production costs (in $). You are required to complete the following
cost table (in your answer sheet): [4 Marks]

Units of Total Fixed Variable Marginal Average Average Average

Output Cost Cost Cost Cost Total Fixed Variable
Cost Coast Cost

0 400 ? ? ? ? ? ?

1 ? ? ? 40 ? ? ?

2 ? ? 100 ? ? ? ?

3 ? ? 200 ? ? ? ?

4 750 ? ? ? ? ? ?

Q 7. The below figure represents a Perfectly Competitive industry, answer the following questions.
[5 Marks]

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 a) What type of a market do you think it is? Justify your answer.
b) Explain if the firm is making economic Profit, economic Loss or neither of the two?
c) Is the firm in the Short Run or Long Run? Explain in detail what difference would it
make?
d) What is the Efficient Scale of output for this firm? Does this firm have Excess Capacity?

Q 8. Given that the income of Liza is $7, Price of Apples $2 and Price of Oranges is $1. Find out How
many units of Apples & Oranges should be purchased by Liza in order to equalize the Marginal Utility?
[5 Marks]
Quantity of Marginal Quantity of Marginal
Apples Utility of Oranges Utility of
(units) Apples (units) Oranges
1 30 6 7
2 25 5 15
3 20 4 18
4 15 3 26
5 10 2 35
6 5 1 40

GOOD LUCK