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Economics help? Give it a shot, if you dare :P (A2 economics)

VazVaz New
edited September 2007 in Vanilla 1.0 Help
Hi guys,

Well, nothing can get more random that this I don't think :P.
Just wondering hoping if you guys could help me out with these two questions. Which one of the multiple choice is correct and why?

#1
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#2
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    NickENickE New
    edited September 2007
    I belive the correct answer for 7 is A: excessive profit in the short run. This is because it is the difference between the average revenue (AR) and the average cost (AC) at the given quantity demand, multiplied by the # of goods (QD). Because the market is monopolistic (which is very close perfect competition), the firms will only make normal profit in the long run (ie. AC = AR; this is because the firms will eventually duplicate each other, eliminating one another's edge). Since it's supernormal profit and it's not in the long run, that leaves A.

    Now economics isn't my best subject (just as a warning), but I think the answer is also A for question 10. This is because the total cost will be the average cost (AC) at a certain quantity demand multiplied by the number of goods (QD). Because the firm wants to maximize profits and not efficiency, that means that the equilibrium position is at E (G will result in higher costs than revenue), therefore ODEK should be the rectangle representing total cost.
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    I asked somebody else and there answer was: 7=c Because the firm is able to influence price by its output decisions, there is a divergence between average and marginal revenue, and the profit maximising point is where marginal cost intersects with marginal revenue. The result is higher prices than would emerge under perfect competition, and a supernormal profit in the long run. This profit is a pure surplus, serving no economically efficient purpose. Such a situation is neither productively nor allocatively efficient purpose. Such a situation is neither productively nor allocatively efficient. 10 = b because total cost = average total cost * by the output (although your answers sound more correct to me) :|
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    NickENickE New
    edited September 2007
    Their answer to 7 is wrong, because normal profit is defined as 0 econimc profit. As there is a very obvious (and large) difference between the average cost and average revenue at that QD, it is supernormal profit. Because of the circumstances (monopolistic competition), it can only occur in the short-run.

    For 10 their explanation contradicts their answer. Their explanation is correct: the average cost at long-term equilibrium position * QD = total cost at given position. OALK, however, is a rectangle formed by marginal revenue and marginal cost; ODEK is the rectangle formed by the average revenue and cost.
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    Just to let you know SirNot - turns out you were 100% correct. Thank god I didnt listen to the other advice. :P
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    this thread does my head in.
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