Microeconomics

TEST 2

This is a “take home” “open book” TEST where students MUST work independently with no external help.
Students are allowed to use any sources of information in order to solve the questions and exercises
below. Put all your answers in this file / save the file as a PDF / upload to the Portal before the deadline /

1. The cost of production. Read the case of Portakabin and identify all activities that company does to
reduce the cost of production.
The Portakabin uses next methods to reduce costs:
 Quality management system
 Cutting out waste from the manufacturing system.
 Environmental management system, Recycling waste
 Just-in-time (reduce the costs of holding stocks)
 Flow production (The production of the modules flows through several stages in
the factory)
 Cellular production
 Batch production

Total revenue

Total costs

Use any necessary Microeconomics graphs to illustrate the process of cost savings!!!

2. Competition. What type1 of competition is petrol stations in Latvia? Explain your answer!
Petrol stations in Latvia are in Perfect competition, because any one can start their business in
petrol stations sphere and no in that kind of business in our country can control market and prices
of the gasoline are directed by supply and demand.
It can’t be a Monopoly or Oligopoly, because there is no One or few firms that control a market.
Everyone can get in to that business anytime. It can be Monopolistic competition because as I said
before prices demand from market.

3. Monopoly. Solve an exercise described below:

JP Company has monopoly on “TheProduct” in the local market. The demand is: Q D=100-2P ⇔ P=50-0,5Q.
The resulting marginal revenue function is MR(Q)=50 – Q. JP Company’s marginal cost of producing
“TheProduct” is MC(Q)=5+0,5Q. Calculate JP Company’s profit maximizing output and price. Calculate the
social cost of JP Company’s monopoly power.
1
Monopoly, Oligopoly, Monopolistic competition or Perfect competition
Include the graph illustrating the solution!

1) MR(Q)=50 – Q=MC(Q)=5+12
Q= 30, P=50-0,5*30= 35
2) Consumer surplus - 0,5(50 – 35)30 = 225
Producer surplus - 0.5(20 – 5)(30) + (35 – 20)(30) = 675
Total surplus - 225+675= 900
3) P= 50 – 0,5Q=MC = 5 + 0,5Q, Q=45
P = 50 – 0,5(45) = 27,5
4) Consumer surplus1 - 0,5(50-27,50)45 = 506,25
Producer surplus1 - 0,5(27,50 -5)45 = 506,25
Total surplus1 – 506,25 + 506,25 = 1 012,50
1012,50 – 900 =112,50 – Society costs

Price MC
50

35 3
0
20

5
MR D

30 Q