BRITISH UNIVERSITY VIETNAM

UNIVERSITY OF LONDON UNIT EC1002

INTRODUCTION TO ECONOMICS
Mark Harris
UoL B.Sc. Year 1 - 2022/2023
TUTORIAL SHEET
November 2022
8
• “” DENOTES A PAST EXAMINATION QUESTION •

1.  Analyse the effect of an increase in demand upon the price and output supplied by a competitive industry. In
what ways would your answer be different if the industry contained only a single supplier?

2.  Suppose that a long run cost function displays economies and then diseconomies of scale. What does this
imply for:
a) the shape of the long run average and marginal cost curves?
b) the shape of the short run average and marginal cost curves?
c) long run equilibrium output and price if the industry were perfectly competitive?

3.  Analyse the effects of a fall in demand on a competitive firm and industry in the long run. In what way would
your answer be different if the industry was monopolistically competitive?

4.  Analyse the impact on a perfectly competitive industry of a technical advance which reduced long run average
cost curves. Would your answer be different if the new technology was available to existing firms in the
industry but could not be imitated by new entrants, who were forced to use the higher cost technology?

5.  Suppose that the government decides to impose a tax which is not related to output (i.e. a "lump-sum" tax)
on all firms in a competitive industry.
a) What would be the effect, in the short and in the long run, on each firm's output and profits, and on the
industry's price and output?
b) In what way would your answer be different if the industry was a monopoly?

6.  Explain why industries characterised by low entry costs and product differentiation sometimes have both
excess capacity and very low profits.

7.  An increase in the cost of capital facing firms in a competitive industry will cause an increase in price and a
decrease in output in the short run but will have no effects on the number of firms in the long run. True or
false, explain.

8.  A lump-sum tax which is levied on a monopolist will cause a fall in the quantity supplied and an increase in
price. True or false, explain.

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9.  The government considers whether to impose a lump-sum tax on a monopoly or to offer it a subsidy per unit.
(a) Describe how the monopolist chooses price and quantity in the absence of government intervention.
(b) Why might a government want to intervene?
(c) Examine the effects of a lump-sum tax.
(d) Examine the effects of a per-unit subsidy.
(e) Why might the government wish to adopt both policies simultaneously?

10.  What does “excess capacity” mean and how does it relate to efficiency?

11.  “A monopolist does not need to worry about average cost as its market price is always greater than that of
a competitive firm.” True or false, explain.

12.  Suppose that the demand faced by a monopolist increases such that at each price it is able to sell 10% more
than before. Marginal cost is constant. The price it charges will be higher than that charged previously.
True or false, explain.

13.  A monopolist is facing a constant price elasticity of demand. An increase of 10% in its marginal coat will
cause an increase of 10% in the equilibrium price. True or false? Explain.

14.  A monopolist is facing a constant price elasticity of demand. An increase of 10% in its marginal cost will
cause an increase of 20% in the equilibrium price. True or false? Explain.

15.  In the long run monopolistic competition is in equilibrium when price equals average cost. Does this mean
that marginal cost too equals price? Explain

16.  As there are no profits above normal in the long-run equilibrium of monopolistic competition, price too must
be equal to marginal cost as in perfect competition. True or false, explain.

17.  An increase in fixed cost will have no effect on the equilibrium price and output of a firm in monopolistic
competition. It will also not affect its inefficiency. True or false, explain.

18.  An increase in a lump-sum tax levied on firms in monopolistic competition will never reduce the degree of
monopolistic power. True or false, explain.

19.  If a lump-sum subsidy is granted to every firm in a competitive industry, the output of each of the original
firms will fall and there will be less firms in the market. True or false, explain.

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20.  (a) Describe the monopolist market structure.

(b) Can one say that the greater is the price elasticity of demand the less power will the monopolist
enjoy?
(c) In what sense is a monopoly market structure inefficient?
(d) Will a lump-sum tax levied on the monopolist help in mitigating the problem?

21.  The overall demand schedule for cigarettes has price elasticity which is greater than unity. The
price elasticity of the “heavy smoker's" demand is less than unity.
(a) What will be the demand elasticity of the “light smoker” if the demand for cigarettes is comprised
of these two groups alone?
(b) Analyse the effects on the total output, each firm’s output, the number of firms and prices in the
short and in the long run when the cost of capital decreases.
(c) What will happen (in the case of (b)) to the capital to labour ratio, to all consumers’ expenditures
and to the expenditures of each group of consumers?
(d) Analyse the effects on the total output, each firm’s output, the number of firms and prices in the
short and the long run when the government has a way of taxing only “heavy smokers”.
(e) What will happen (in the case of (d)) to the capital to labour ratio, to all consumers’ expenditures
and to the expenditures of each group of customers?

22. The competitive market for new homes is in long run equilibrium. Its demand is comprised of two groups:
first time buyers and second home buyers.
(a) Describe the long run equilibrium paying attention to the distribution of surplus between first time
buyers and second home buyers.
(b) Analyse the effects on the total output, each firm’s output, the number of firms and prices in the
short and in the long run when the cost of labour increases.
(c) What will happen (in the case of(b)) to the capital to labour ratio, to all consumers’ expenditures and
to the expenditures of each group of consumers?
(d) Analyse the effects on the total output, each firm’s output, the number of firms and prices in the
short and in the long run when the government offers a subsidy to first time buyers.
(e) What will happen (in the cases of(d)) to the capital to labour ratio, to all consumers’ expenditures
and to the expenditures of each group of consumers?

23.  The fast car industry is perfectly competitive and fast cars are perishable goods. The demand for fast cars
is comprised of two main groups: the criminals (those of them who do not steal their cars) and the police.
The price elasticity of the former group is greater than unity and that of the latter is less than unity. The
spending on cars by the police is funded by the government. The market is in long-run equilibrium, and the
government considers to policies to increase the use of fast cars by the police:
(i) to offer a subsidy for car purchases by the police
(ii) to levy a tax on the other consumers of fast cars
(a) Analyse the short-run effects of the two schemes on price and total output, on the spending on cars
by criminals, on the government’s overall spending on police cars and on the output of each fast car
manufacturer. Which of the schemes would you advise the government to adopt, and why?
(b) Analyse the long-run implications for all the items in (a) under the two schemes. Would you
recommend the adoption of the same scheme as in (a)? Explain your answer.
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24.  An industry has a sole producer because of a cost reducing invention which was made by the producer. To
prevent others from using the same technology, the producer has registered the discovery as a patent and
is now required to pay a fee to keep the invention as a registered patent.
(a) Analyse the effects on price and output of an increase in the registration fees. Will such an increase
correct an inefficiency?
(b) As registration fees increase, the monopolist decides to allow other firms access to its technology
provided they pay the firm a license fee. What will happen now to the market’s structure and what
will be the long-run equilibrium? Could it be worthwhile for the firm to lose its monopolistic power?

25.  The demand for petrol is comprised of two groups of consumers. One group consists of the consumers who
live a short distance from public transport. The other group live too far away from it to be able to consider
it as an alternative means of transportation. Petrol is supplied in a competitive market.
(a) Describe the initial equilibrium in the market for petrol while paying attention to the expenditure of each
group of consumers.
(b) Analyse the short run and long run effects of an increase in the price of public transport.
(c) The consumers who do not use public transport complain that they have to pay more for petrol simply
because a service they cannot enjoy has become more expensive for those people who do have the
choice. How would you reply to this complaint?
(d) How will an increase in the price of crude oil affect the equilibrium in the market for petrol? How will the
burden be distributed, in the long run, between those who depend entirely on their cars and those who
do not? [Assume that the government will ensure that public transport prices will not change].

26. An increase in demand facing a competitive industry will affect, in the long run, the number of firms in the
industry according to whether the price had increased, decreased or remained the same.

27.  A local competitive market for x is supplied by local producers and some multinationals who produce the
goods outside the economy at lower wages. Assume that due to some arrangement between the host
country of the cheap labour and the existing multinationals, no other producer can take advantage of their
cheap labour.

(a) Describe the initial long-run equilibrium and the distribution of market share between the local producers
and the multinationals.
(b) What would happen if there was no agreement between the existing multinationals and the host
government?
(c) Given that the above mentioned agreement exists, the government decides to levy a lump-sum tax on the
multinationals to help the industry generate greater local employment. Analyse the effects of such a
policy in the short and the long run. Will it achieve its aims?

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