Economics past Economics past paper paper

2001 paper 1 Question 92001 paper 1 Question 9

AdM@rt incurs a loss $ 1 for AdM@rt incurs a loss $ 1 for every dollar of sales revenueevery dollar of sales revenue

loss ratio is c________loss ratio is c________ Total cost e______ total revenueTotal cost e______ total revenue AC___AR at each unit of outputAC___AR at each unit of output This excess of AC over AR This excess of AC over AR

remains u________ over a wide remains u________ over a wide range of outputrange of output

nchanged

>xceeds

onstant

(a(a))

AR = MR = D

AC = MC

Loss

revenue

0

Constant loss ratio of (1:1)

A

B

Q1

Price

Q

P=10

20

In the diagram,In the diagram,AC and AR curve : AC and AR curve :

- H orizontal

AC curve liesAC curve lies above below

To show the firm suffers loss

At each unit of output :

Q 1

To show the constant loss ratio

AR curve

Loss ratio

= AB

BQ 1the vertical distance the vertical distance between the AC and AR between the AC and AR curve is curve is (variable/constant).(variable/constant).

∵

loss ratio is constant over wide loss ratio is constant over wide range of outputrange of output

∴

(b(b))

From (a), we know that AdM@rt From (a), we know that AdM@rt has a constant loss ratiohas a constant loss ratio

This means it faces a This means it faces a (horizontal/downward sloping) (horizontal/downward sloping) demand curve.demand curve.

Regards it as operating under Regards it as operating under (perfect competition/monopoly)(perfect competition/monopoly)

AdM@rt is a price – t____ firmAdM@rt is a price – t____ firmaker

In fact, products sold by AdM@rt In fact, products sold by AdM@rt (can/cannot) be found in any (can/cannot) be found in any supermarket and grocery storessupermarket and grocery stores

Consumers would regard her Consumers would regard her products as similar to those found products as similar to those found in other storesin other stores

products are h___________ from products are h___________ from the buyers’ point of viewthe buyers’ point of view

=> product homogeneity is a => product homogeneity is a feature of the price – takers’ feature of the price – takers’ market market

omogeneous

(c(c))

AdM@rt was operating with AdM@rt was operating with constant costconstant cost

Constant cost means that as Constant cost means that as output is increased, both AC and output is increased, both AC and MC remains u_________MC remains u_________

AC e_____ MCAC e_____ MC AC curve equals MC curve and is AC curve equals MC curve and is

h________h________

nchanged qual

s

orizontal

~ THE END ~ THE END ~~

Group members:Group members:Helen Cheung (9)Helen Cheung (9)Carmen Leung (25)Carmen Leung (25)Jade Tsu (31)Jade Tsu (31)Ada Wong (32)Ada Wong (32)