Effects of Equilibrium Price Changes

1. (a) In each of the following examples explain the effects of the changes on equilibrium price equilibrium quantity demand and supply Effects of Equilibrium Price Changes.

(i) Average incomes increase

(ii) The cost of raw materials falls

(iii) The population decreases                      (3 marks each)

(b) Using diagrams to help with your answer show the difference between a price floor imposed by the government on a good and a production subsidy. How does this affect the price of the product and the quantity in each case? Effects of Equilibrium Price Changes

(8 marks)

2. (a) Suppose that a monopolist firm has a marginal revenue curve given by the formula MR = 120 – 4Q and the marginal cost of production is constant where MC = 40. Calculate the profit maximising level of output. What price will the monopoly charge for its product at this level of output? (7 marks)

(b) A perfectly competitive firm has the following costs and revenues based on a price of £80 at all levels of output Effects of Equilibrium Price Changes

Using the information given in the table above calculate the following

(i) The fixed cost at all levels of output

(ii) The marginal cost

(iii) Total revenue

(iv) Break-even level of output

(v) Profits

(10 marks)

3. (a) Using diagrams to assist your answer, say how the exchange rate of the pound sterling (£) for the Euro (€) will be affected by each of the following Effects of Equilibrium Price Changes

• A rise in UK interest rates relative to interest rates in the Eurozone
• Higher levels of inflation in the UK compared to Eurozone countries
• Speculators believe that the value of the pound will fall over the next 6 months compared to the Euro

(3 marks each)

(b) Explain the likely effects of an appreciation of the pound (£) against the Euro (€) on the balance of payments for the UK. How does this affect aggregate demand and the level of national income in the UK all other things being equal?

(8 marks)

4. (a) Using diagrams to support your answer, explain the main differences between demand–pull inflation and cost–push inflation.        (8 marks)

(b) Can fiscal policy be used to increase economic output when the economy is at full capacity? Justify your answer.                                                  (9 marks)