1. PART (1) SOLUTION FOR Q (1) What does it mean to say that: “A firm
operating under perfect competition conditions is a price taker"?
In perfect competition, each firm is a price taker.
- A price taker is a firm that cannot influence the price of a good
or service.
- Sellers and buyers are well informed about prices.
- No single firm can influence the price .
- It must “take” the equilibrium market price.
Why Can't this firm set any price it chooses?
BECAUSE THERE ARE VERY LARGE NUMBER OF SELLER
AND THE TYPE OF PRODUCTS IS IDENTICAL
Many firms sell identical products to many buyers.
What if it operates in a monopolistically competitive market,
would it be able to set the price? Why? Give some real life
examples to support your answer


Yes the firm will be able to set the price because in
monopolistic competitive market each firm produces similar but
slightly different products called product differentiation and it
possesses an element of market power
IN real life u can find in china factory produce 10 grades for 1
product and it seems to look alike but the different in quality
.also SHAMADAN biscuit seems to be like locker biscuit but really
they are different in quality

SOLUTION FOR Q (2) Would you agree with this statement? If not,
provide a better description for the term “economies of scale”.
Explain how they may be achieved by organizations. Highlight
what would prevent them to occur.
 Economies of scale are cost advantages reaped by
companies when production becomes efficient. Companies can
achieve economies of scale by increasing production and
lowering costs. This happens because costs are spread over a
larger number of goods. Costs can be both fixed and variable.
 The size of the business generally matters when it comes to
economies of scale. The larger the business, the more the cost
savings.
 Economies of scale can be both internal and external.
Internal economies of scale are based on management
decisions, while external ones have to do with outside factors.
 Economies of scale are an important concept for any
business in any industry and represent the cost-savings and
competitive advantages larger businesses have over smaller
ones.
 Most consumers don't understand why a smaller business
charges more for a similar product sold by a larger company.
That's because the cost per unit depends on how much the
company produces. Larger companies are able to produce
more by spreading the cost of production over a larger amount
of goods. An industry may also be able to dictate the cost of a
product if there are a number of different companies producing
similar goods within that industry.
 There are several reasons why economies of scale give rise
to lower per-unit costs. First, specialization of labor and more
integrated technology boost production volumes. Second, lower
per-unit costs can come from bulk orders from suppliers, larger
advertising buys, or lower cost of capital. Third, spreading
internal function costs across more units produced and sold
helps to reduce costs.
 Internal functions include accounting, information technology,
and marketing. The first two reasons are also considered
operational efficiencies and synergies. The second two reasons
are cited as benefits of mergers and acquisitions.








A company can create a diseconomy of scale when it becomes
too large and chases an economy of scale.
Economies of scale are features of a firm’s technology that
lead to falling long-run average cost as output increases.
Diseconomies of scale are features of a firm’s technology that
lead to rising long-run average cost as output increases.
Constant returns to scale are features of a firm’s technology
that lead to constant long-run average cost as output
increases.
A firm experiences economies of scale up to some output level.
Beyond that output level, it moves into constant returns to scale
or diseconomies of scale.
Minimum efficient scale is the smallest quantity of output at
which the long-run average cost reaches its lowest level.
If the long-run average cost curve is U-shaped, the minimum
point identifies the minimum efficient scale output level.

Solution Q(3) the principle “marginal revenue equal marginal
cost" condition for profit maximization is rather confusing
Discuss the rationale behind the condition, highlighting how
different it is from the break-even analysis.
The marginal cost of production and marginal revenue are
economic measures used to determine the amount of output
and the price per unit of a product that will maximize profits. A
rational company always seeks to maximize its profit, and the
relationship between marginal revenue and the marginal cost of
production helps to find the point at which this occurs. The
point at which marginal revenue equals marginal cost
maximizes a company's profit.
Calculating Marginal Cost of Production
Production costs include every expense associated with
making a good or service. These costs are broken down into
fixed costs and variable costs. Fixed costs are relatively stable,
ongoing costs of operating a business that is not dependent on
production levels. Fixed costs include general overhead
expenses like salaries and wages, building rental payments or
utility costs.
Variable costs are those directly related to, and that varies with,
production levels, such as the cost of materials used in
production or the cost of operating machinery in the process of
production. Total production costs include all the expenses of
producing products at current levels.
As an example, if a company that makes 150 widgets has
production costs for all 150 units it produces. The marginal cost
of production is the cost of producing one additional unit. For
example, say the total cost of producing 100 units of a good is
$200. The total cost of producing 101 units is $204. The
average cost of producing 100 units is $2, or $200 ÷ 100.
However, the marginal cost for producing unit 101 is $4, or
($204 - $200) ÷ (101-100).
Reaching Optimum Production
At some point, the company reaches its optimum production
level, the point at which producing any more units would
increase the per-unit production cost. In other words, additional
production causes fixed and variable costs to increase. For
example, increased production beyond a certain level may
involve paying prohibitively high amounts of overtime pay to
workers, or the maintenance costs for machinery may
significantly increase.
The marginal cost of production measures the change in the
total cost of a good that arises from producing one additional
unit of that good. The marginal cost (MC) is calculated by
dividing the change (Δ) in the total cost (C) by the change in
quantity (Q). Using calculus, the marginal cost is calculated by
taking the first derivative of the total cost function with respect
to the quantity:
MC = ΔC/ΔQ
The marginal costs of production may change as production
capacity changes. If, for example, increasing production from
200 to 201 units per day requires a small business to purchase
additional business equipment, then the marginal cost of
production may be very high. However, this expense may be
significantly lower if the business is considering an increase
from 150 to 151 units using existing equipment.
A lower marginal cost of production means that the business is
operating with lower fixed costs at a particular production
volume. If the marginal cost of production is high, then the cost
of increasing production volume is also high and increasing
production may not be in the business's best interests.
Calculating Marginal Revenue
Marginal revenue measures the change in the revenue when
one additional unit of a product is sold. Assume that a company
sells widgets for unit sales of $10, sells an average of 10
widgets a month and earns $100 each month. Widgets become
very popular, and the same company can now sell 11 widgets
for $10 each for a monthly revenue of $110. Therefore, the
marginal revenue for the 11th widget is $10.
The marginal revenue is calculated by dividing the change in
the total revenue by the change in the quantity. In calculus
terms, the marginal revenue (MR) is the first derivative of the
total revenue (TR) function with respect to the quantity:
MR = ΔTR/ΔQ
For example, suppose the price of a product is $10 and a
company produces 20 units per day. The total revenue is
calculated by multiplying the price by the quantity produced. In
this case, the total revenue is $200, or $10 x 20. The total
revenue from producing 21 units is $205. The marginal revenue
is calculated as $5, or ($205 - $200) ÷ (21-20).
How Can Marginal Revenue Increase?
Marginal revenue increases whenever the revenue received
from producing one additional unit of a good grows faster (or
shrinks more slowly) than its marginal cost of production.
Increasing marginal revenue is a sign that the company is
producing too little relative to consumer demand, and there are
profit opportunities if production expands.
Let's say a company manufactures toy soldiers. After some
production, it costs the company $5 in materials and labor to
create its 100th toy soldier. That 100th toy soldier sells for $15.
The profit for this toy is $10. Now, suppose the 101st toy
soldier also costs $5, but this time can sell for $17. The profit
for the 101st toy soldier, $12, is greater than the profit for the
100th toy soldier. This is an example of increasing marginal
revenue.
Balancing the Scales of Marginal Revenue
For any given amount of consumer demand, marginal revenue
tends to decrease as production increases. In equilibrium,
marginal revenue equals marginal costs; there is no economic
profit in equilibrium. Markets never reach equilibrium in the real
world; they only tend toward a dynamically changing
equilibrium. As in the example above, marginal revenue may
increase because consumer demands have shifted and bid up
the price of a good or service.
It could also be that marginal costs are lower than they were
before. Marginal costs decrease whenever the marginal
revenue product of labor increases—workers become more
skilled, new production techniques are adopted, or changes in
technology and capital goods increase output.
When marginal revenue and the marginal cost of production
are equal, profit is maximized at that level of output and price:
Example
For example, a toy company can sell 15 toys at $10 each.
However, if the company sells 16 units, the selling price falls to
$9.50 each. The marginal revenue is $2, or ((16 x 9.50) - (15
x10)) ÷ (16-15). Suppose the marginal cost is $2.00; the
company maximizes its profit at this point because the marginal
revenue is equal to its marginal cost.
When marginal revenue is less than the marginal cost of
production, a company is producing too much and should
decrease its quantity supplied until marginal revenue equals
the marginal cost of production. When the marginal revenue is
greater than the marginal cost, the firm is not producing enough
goods and should increase its output until profit is



.Profit maximization={sales revenue-cost}
Marginal cost (MC) is the increase in total cost that results from
a one-unit increase in total product
Over the output range with increasing marginal returns,
marginal cost falls as output increases.


Over the output range with diminishing marginal returns,
marginal cost rises as output increases
Solution for Q(4) Explain the rationale for Porter’s generic
strategy options in the light of the monopolistic competition
market structure.

First of all monopolistic competition market structurs has

ALarge number of sellers

A differentiation in types of product

No barriers to entry the market

A firm price setter



Porter wrote in 1980 that strategy targets either cost
leadership, differentiation, or focus.[1] These are known as
Porter's three generic strategies and can be applied to any size
or form of business. Porter claimed that a company must only
choose one of the three or risk that the business would waste
precious resources. Porter's generic strategies detail the
interaction between cost minimization strategies, product
differentiation strategies, and market focus strategies of firms.
cost leadership this strategy involves the firm winning market
share by appealing to cost-conscious or price-sensitive
customers. This is achieved by having the lowest prices in the
target market segment
If a firm is targeting customers in most or all segments of an
industry based on offering the lowest price, it is following a cost
leadership strategy and it can command prices at or near the
industry average (price setter)


Differentiation: Differentiate the products/services in some way
in order to compete successfully.
Differentiation strategy is not suitable for small companies. It is
more appropriate for large companies .

PART two case (A) solution .

Jackie Brown is selling 50 units of output per day

. A price of $20 per unit, the cost of raw material, direct labor,
energy, and other variable inputs is about $24000 monthly.

TR =Q*P=50*20 =1000*=30000 per month

TVC=24000

We compare between( total revenue and total variable cost).

Contribution margin (CM)=TR- TVC=30000-24000=6000

SO TR>TVC so MY decisition is continue to operate at loss

CASE (B) solution




Jessie Pharmacy is expected to generate yearly revenue of
$500,000, expects to spend $350,000 per year on purchasing
drugs and cosmetics for resale to her customers, total salaries
$48,000 per year,
Opportunity cost
1-Continue to work as a senior medical representative for
$50,000 per year.
2-Accepts a research position in another company for $70,000

3- she could rent out the pharmacy store space for $42,000 per
year.
Economic profit
ITEM
AMOUNT
Total revenue
500.000$
Cost of resources bought in market
Drugs & cosmetics
Wages
350.000$
48.000$
398.000$
Opportunity cost
Forgone rent
42.000$
Forgone salary
50.000$
Forgone position
70.000 $
162.000$
Economic profit
- 60.000
Accounting profit
ITEM
AMOUNT
Total revenue
500.000
Cost of resources bought in market
Drugs & cosmetics
Wages
Accounting profit
350.000$
48.000$
398.000$
102.000$
I recommended not to proceed with opening her own pharmacy
Because economic profit = - 56.000$ it means loss
CASE C solution
1 - Cost of unit in Mexico=5/200 = 0.025
2 - Cost of unit in u s=25/400 =0.0625
3 - Galaxy isn,t maximizing output relative to its labor cost
because in US plant
CASE D solution
Q
P
TR
TFC
TVC
TC
TT
0
200
0
300
0
300
-300
1
200
200
300
100
400
-200
2
200
400
300
180
480
-80
3
200
600
300
220
520
80
4
200
800
300
300
600
200
5
200
1000
300
390
690
310
6
200
1200
300
500
800
400
7
200
1400
300
640
940
460
8
200
1600
300
800
1100
500
9
200
1800
300
1000
1300
500
10
200
2000
300
1250
1550
450
8680
2320
11000
TT =TR-TC=11000-8680= 2320
1 - PROFIT maximization level at QUANTITY (9)
Apex’s profit =11000-8680=2320$
2- If the market price dropped to $80
Q
P
TR
TFC
TVC
TC
TT
0
80
0
300
0
300
-300
1
80
80
300
100
400
-320
2
80
160
300
180
480
-320
3
80
240
300
220
520
-280
4
80
320
300
300
600
-280
5
80
400
300
390
690
-290
6
80
480
300
500
800
-320
7
80
560
300
640
940
-380
8
80
640
300
800
1100
-460
9
80
720
300
1000
1300
-580
10
80
800
300
1250
1550
-750
4400
3300
8680
-4280
TT =TR-TC=4400-8680= -4280
1 - PROFIT maximization level at QUANTITY (4)
Apex’s LOSS=4400-8680= - 4280 $
IN THIS CASE TR >TFC so I recommend to continue in the market
3 - If the market price dropped further to $40
Q
P
TR
TFC
TVC
TC
TT
0
80
0
300
0
300
-300
1
80
40
300
100
400
-360
2
80
80
300
180
480
-400
3
80
120
300
220
520
-400
4
80
160
300
300
600
-440
5
80
200
300
390
690
-490
6
80
240
300
500
800
-560
7
80
280
300
640
940
-660
8
80
320
300
800
1100
-780
9
80
360
300
1000
1300
-940
10
80
400
300
1250
1550
-1150
2200
3300
8680
-6480
TT =TR-TC=2200-8680= - 6480
1 - PROFIT maximization level at QUANTITY (1)
Apex’s LOSS=2200-8680= - 6480$
IN THIS CASE TR <TFC so I recommend to EXIT the market
CASE E SOLUTION
The four-firm concentration ratio is the percentage of the
total industry sales accounted for by the four largest firms in the
industry .
1 - Four firm =60%+.04+.04+.04+.04=76%>50%
So this marker is high concentration
2 - Herfindahl-Hirschman Index “HHI” is the sum of the
squared market shares of the 50 largest firms in the industry.
NO OF FIRM
MRK SHARE
(MRK SHARE)2
HHI
1
60
3600
3760
2
4
16
3
4
16
4
4
16
5
4
16
6
4
16
7
4
16
8
4
16
9
4
16
10
4
16
11
4
16
- HHI=3600>2500 SO THIS MARKET IS HIGH
CONCENTRATIOIN AND OLIGOPLY .
>2500 oligopoly
CASE F solution
1 - market structure do Pepsi and Coke operate (oligopoly)
2- How can you explain the pricing behavior of Pepsi and
Coke