“

LU Ghana Take-Home Exam Cover Sheet”

“Student Number
38443708
(On card)”:

“Module Name”: Principles of Economics

“Module Mnemonic”: GHECON102J

Section A: questions: 2,4,5,8,10,11,12,13,14,15

“Questions Answered”:
Section B: questions: 2, 3, 5

“Word Count”:

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“This Cover Sheet must be used for all Take-Home Exams submitted in Lancaster
University Ghana.”
“Please start the text of your Exam Answer on Page 2 of this document”
 Question Number:
SECTION A: MCQ:

Answers:

2. C

4. B

5. D

8. B

10. B

11. B

12. C

13. D

14. A

15. A

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 Question
SECTION Number: 2:
B: QUESTION

The market for wheat is predominantly perfectly competitive while that of electricity is
usually a monopolistic market in most African economies.

A. Differentiate between perfect competition and monopoly markets.

Answer: Perfect competition and monopoly are on the two opposite extremes of market
structures. Although, they do have similarities within firms in a perfectly competitive market
and monopoly firms. They both acquire the same production and cost functions and strive to
reach maximum profit. The distinctions/ differences between them are that in a perfectly
competitive market, marginal cost is equal to price and firms receive zero economic profit. In
Monopoly markets, the price lies above marginal cost and firms receive positive economic
profit. In terms of equilibrium production, perfect competition produces in a way in which the
quantity as well as the price of a product is economically sufficient and efficient. Monopoly
markets produce an equilibrium where the prices of products are higher than the quantity.
Due to the way in which monopoly markets produce an equilibrium, governments intervene
to regulate monopoly markets and lead them into increased competition.

B. Explain three main policies towards monopolies.

Answer: The three main policies towards monopoly markets are as follows,

1. Regulating the behaviour of monopolies, meaning that the government is seeking to

protect interests of any consumers. For example, if a monopoly market was to set
prices higher than those in competitive markets, the government can intervene with
price capping which is the limiting of price increases.
2. Making industries that are monopolized more competitive to fit into competitive
markets to enhance economic benefits.
3. Turning certain private monopolies into public/ government-run enterprises in which
government can take direct control.

C. Define externalities. Explain three public and three private solutions for addressing
the issue of externalities.

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Answer: An externality is a consequence/ cost or benefit of an industrial or economic activity
which effects unrelated parties. This cost is not conveyed in market prices. Economists view
externalities as a major conflict that could possibly lead to market failure.

Public solutions for addressing the issue of externalities are as follows,

1. Quantity regulating where governments intervene to fix the issue of an externality by

demanding firms to produce quantities which are socially efficient.
2. Quantity regulation is a straight forward solution although another is Pigouvian taxes
which are taxes that are portrayed on market transactions which lead to negative
externalities created by individuals who aren’t related nor involved.
3. Price policy where a tax or subsidy (which is a government financial aid) is given and
equal to marginal damage made per unit to overcome the externalities.

SECTION B: QUESTION 3:

Suppose there is a perfectly competitive industry where all the firms are identical with
identical cost curves. Furthermore, suppose that a representative firm’s total cost is
given by the equation 𝑇𝐶 = 100 + 𝑞 2 + 𝑞 where q is the quantity of output produced by
the firm. You also know that the market demand for this product is given by the
equation P = 1000 – 2Q where Q is the market quantity. In addition, you are told that
the market supply curve is given by the equation P = 100 + Q.

A. What is the equilibrium quantity and price in this market given this additional
information?

Working:

Equilibrium is set where market demand is equal to market supply, as follows

1000 – 2Q = 100 + Q

900 – 2Q = Q

900 = 3Q

300 = Q

Plugging back 300 into both the market demand and supply curve, we get P = 400, as follows

1000 – 2(300) = 400

100 + 300 = 400

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B. The firm’s MC equation based upon its TC equation is MC = 2 𝑞 + 1. Given this
information and your answer in part (a),

I. What is the firm’s profit maximizing level of production, total revenue, total cost and
profit at this market equilibrium?

ANSWER: From (a), it is established that the equilibrium market price is 400. It was also
established that the firm reaches profit maximization through producing a level output where
MR = MC. Knowing that the equilibrium market price is the firm’s marginal revenue, it is
clear that MR = 400. Going back to MR = MC. We can find

- Profit maximizing level of production: 199.5 Units

400 = 2q + 1

399 = 2q

199.5 = q

- Total Revenue: $79800

P x Q = $ 400 x 199.5 units = $79800

- Total Cost: $40099.75

Q = 199.5

TC = 100 + (199.5) ^2 + 199.5

TC = $40099.75

- Total Profit: $39700.25

Total profit is the difference between TR and TC

TR – TC = 79800 – 40099.75

TP = $39700.25

ii. Is this a short-run or long-run equilibrium? Explain your answer.

ANSWER: In this scenario/ situation, this is a short-run equilibrium because profit does not
equal to zero and therefore it can’t be a long-run equilibrium.

iii. Given your answer, what do you anticipate will happen in this market in the long-
run?

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ANSWER: In the long-run, there will be an increase in market quantity due to the entry of
firms, since the economic profit is positive in the short run. As for the market price, it will
decrease as well as firms in the industry earning zero economic profit.

C. What are the determinants of Price elasticity of demand for a good or service?

ANSWER: The determinants are various including time horizon, meaning that the elasticity
increases as the time period increases where consumers are given more time to find
substitutes of goods. Another is the close substitutes, for example people that drink Lipton tea
and substituting it for English Breakfast tea. Another determinant is the proportion/ amount
of income that’s devoted specifically on each good produced. Definition of the market is a
determinant of price elasticity as well as the necessities of the goods and services in
comparison to buying the goods and services as luxuries.

Question Number:
SECTION B: QUESTION 5:

Unemployment is a topical issue for every economy as every government puts in efforts
to increase employment in order to boost economic activity.

A. Define unemployment

Answer: Unemployment is the inability to find a job/ not having a job for people of a
working age who are available and able to work at current wage rates. Those people seek to
reach employment which is the state of having a paid job.

B. Explain the main types of unemployment that exist in every economy.

Answer: The main types of unemployment are as follows,

1) Structural: which is a mismatch of working skills that are required for job opportunities
which exist and the working skills of people out of work. It is caused by competition from
other markets, geographic differences, irrelevant job-related skills and change in the structure
of the economy.

2) Frictional: which is caused by search time needed for the entering and re-entering of
workers who are changing jobs that have demandable working skills.

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3) Cyclical: which is caused by lack of jobs during a recession. It is the type of
unemployment which is the main focus of the macroeconomic policy. It could possibly cause
unemployment rates to increase at a rapid speed and the difficulty is that the rates decrease
slowly.

4) Seasonal: which is caused by the continuous changes in hiring workers/ employees due to
changes in demand caused by seasonal/weather conditions.

C. Discuss five (5) implications that unemployment had for individuals and the society
or economy at large.

Answer:

The implications in which unemployment caused upon individuals and the society are
financial breakdowns, where people don’t have jobs and therefore no income (no money/ no
funds). This leads to poverty due to the lack of income where people don’t have the funds to
purchase needed supplies for a living such food and drink to survive. Homelessness is caused
due to the inability of paying rent due to no income which is cause by unemployment. The
inability to afford public transportation. The gradual decline of working skills caused by the
amount of time people spend without working where they don’t use their working skills.
Socially, an economy that has an increased rate of unemployment is not engaging well in the
use of its resources effectively nor efficiently. Due to unemployment, any person who
receives a job even if it doesn’t suit their working skills, the accepted job below or above
their skills could lead to a decrease in economic efficiency. As for the economy, the level of
unemployment being high will cause a severe decline in a country’s economy as when people
don’t have good income that they receive from jobs, their demand for products will decrease
due to their inability to afford any goods and services and therefore supply will also decrease
due to the decreasing of the demand and the economy will be devastated leading to a
possibility of another great depression. An example of unemployment’s effect on an economy
is COVID-19. In the beginning, humans panicked due to the seriousness and fear of the
disease. The supermarket trips were reduced and as a result supply reduced. Families and
friends were no longer going out to restaurants and cafes and therefore workers went through
unemployment as they had no one to serve or sell to or deliver to at the time. All airports shut
for a while and therefore economic trade rate also lowered in many countries which also
caused a severe economic decay.

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