Final assessment

Question 1 (12 marks)

1. a) How does the recent novel Coronavirus (Covid-19) affect the circular flow of goods and incomes. Explain your answer. (2 points)
2. b) Is there any relationship between short-run average cost curve and long-run average cost curve? Explain your answer.  (2 points)
3. c) Delta Ltd. is a business firm which produces hand liquid soap. The following diagram shows the cost and revenue curves of Delta.

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1. Under what kind of competition is Delta ltd operating its business? Explain your answer (1 point)
2. What is the Profit maximize output for Delta? Shade in the amount of profit it makes in the diagram. (2 points)
• At what price and output does the firm break-even and why? (1 point)

1. d) Adam, a first-year degree student, wants to improve his immunity system during this Coronavirus epidemic. He has planned to spend his money on purchasing fruits: mango and orange. He wrote down two sets with his preferences between various combinations of mango and orange. Each set should denote combinations in between he is indifferent.
 Set 1 Mango Orange 18 2 14 4 12 8 8 12 6 16 2 20 Set 2 Mango Orange 16 2 12 4 10 8 8 12 6 14 2 16

1. What is Adam’s marginal rate of substitution of mango for orange in set 2 for 4th orange? (1 point)
2. What is Adam’s marginal rate of substitution of mango for orange in set 1 for 8th orange? (1 point)
• Explain why it cannot be true that both sets are indifferent curves (2 points)

Question 2 (12 Marks): Choose one question (either Set A or Set B)

Set A

Let the price on the market be given by

Suppose there is only one firm in the market with marginal cost equal to 10.

1. Calculate the resulting quantity for the monopolist when this firm wishes to maximise profit. (4 points)

Suppose there are two firms on the market with marginal costs 6 and 9. Both firms are profit-maximising players on the market.

1. Calculate the resulting quantities if the firms compete under Cournot (6 points).
• Calculate the resulting quantities if the firms compete under Bertrand (2 points)

Set B

1. Explain the characteristics monopoly, oligopoly, monopolistic and perfect competition markets                            (3 points)
2. Imagine that Sunflower, a private company, recycles bottles and supplies to beverage companies. The following table shows the company’s private marginal costs and external benefits to the society from the company’s recycling (5 points).
 Output (‘000’) Price (£) Marginal (private) costs (£) Marginal external benefit (£) Marginal social cost (£) 1 80 64 20 2 80 60 20 3 80 60 16 4 80 64 12 5 80 68 8 6 80 72 8 7 80 80 8 8 80 88 8 9 80 96 8 10 80 112 4

1. Please explain the definition of Marginal Social Cost. Calculate the column for marginal social cost in the above table? (1 mark)
2. Assuming no government intervention, how much will the firm produce to maximise profits and why? (1 mark)
• What is the socially optimum level of output and why? (2 marks)
1. What subsidy per (‘000’) would the government have to pay the company to encourage it to produce this level of output? (1 mark)

1. Do you think that government should give subsidy for environmentally friendly products? Please explain your answer with proper reasons (4 points)

Question 3 (12 points)

The difference between rich and poor is becoming more extreme, and as income inequality widens the wealth gap in major nations, education, health and social mobility are all threatened — Helene D. Gayle

1. As an economist, how do we measure income inequality of a country? Explain your answer? (3 points)
2. Analyse the income inequality in the UK in last 50 years (5 points)

“The Coronavirus will be a catastrophe for the Poor. Economic activity has ground to a halt as borders shut, cities lock down, and people retreat behind closed doors to stem the spread of COVID-19. Workers are being laid off by the millions.”

1. What measures should the UK government undertake to reduce income inequality during this coronavirus crisis?              (4 points)

Question 4 (12 points)

1. Suppose you are CEO (Chief executive officer) of Delta Ltd which produces hand liquid soap. Would you follow traditional theory of the firm: profit maximization? Or would you think alternative theories? Explain your answer with proper reasons.                                (4 points)
2. Read the following case and answer the following relevant questions (8 points)

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