Assessment 9
ECONOMICS
1 hour
This paper must be answered in English.
Answer ALL questions.
Name: ____________________________
Class: ____________________________(
Marks: _________ / 62
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)
New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
Structured Questions (62 marks)
1. Simple monopoly pricing is a common pricing practice adopted by monopolists.
(a)
What is simple monopoly pricing? (2 marks)
(b)
With the aid of separate diagrams, identify the elasticity of demand at the price charged by a
monopolist adopting simple monopoly pricing under
(i) positive
(ii) zero
marginal cost of production. (8 marks)
(c)
Using your diagram in (b)(ii), explain whether a monopolist adopting simple monopoly pricing is
economically efficient under zero marginal cost of production. (5 marks)
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Price ($)
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Quantity
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New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
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2. (a)
(b)
What is ‘third-degree price discrimination’? (2 marks)
Identify whether EACH of the following cases is an example of third-degree price discrimination.
Explain your answer.
(i) Different vehicles (e.g. private cars, trucks, buses, containers, etc.) are charged different tolls
for using the same tunnel.
(ii)
When there are vacant seats, a railway company charges different passengers different fares
without making public announcement. (6 marks)
(c)
What are the general conditions for successfully practising third-degree price discrimination?
Explain any THREE of them. (6 marks)
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New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
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3. (a) (i)
(ii)
Define ‘anti-competition’. (2 marks)
What are the THREE types of mergers that can be regarded as anti-competitive? Briefly
explain EACH of them. (6 marks)
(b) Explain with THREE reasons why anti-competitive behaviours may not be desirable from a social
viewpoint. (6 marks)
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New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
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4. (a) Explain under what condition can a monopoly be regarded
(i)
as anti-competitive? (3 marks)
(ii)
NOT as anti-competitive? (3 marks)
(b) Horizontal agreement is a possible form of anti-competitive behaviours. Name and briefly explain
THREE examples of such horizontal agreement. (9 marks)
(c) Use THREE economic reasons to explain why competition policy is justified. (4 marks)
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New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
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New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
Assessment 9 (Suggested Answers)
Structured Questions
1. (a) Simple monopoly pricing means a firm sets only one price for each unit of its output.
At this price, consumers can buy as much as they want.
(b)(i)
(1)
(1)
Mark allocation for the diagram:
Price ($)
-
(1)
(a horizontal and positive MC
Above mid-point
MC
 Ed > 1
Q determined by MC = MR > 0
curve is acceptable)
-
Price charged at a level where
(1)
Ed > 1
P
Mid-point  Ed = 1
MC = MR
D = AR = MB
0
Quantity
Q MR
When the marginal revenue at the profit-maximizing output is positive,
(1)
the elasticity of demand is greater than 1.
(1)
(ii)
Mark allocation for the diagram:
Price ($)
-
Q determined by MC = MR = 0
(1)
-
Price charged at a level where
(1)
Ed = 1
Mid-point  Ed = 1
P1
MR
MB > MC
Deadweight
loss
0
MC = MR
Q1
D = AR = MB
Q2
MC = 0
Quantity
When the marginal revenue at the profit-maximizing output is zero,
(1)
the elasticity of demand equals 1.
(1)
(c) Under zero marginal production cost, the monopolist produces at Q1 where MR =
(1)
MC = 0.
But between quantities Q1 to Q2, the marginal benefit (MB) is greater than the
marginal cost (MC) of production.
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(1)
New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
As they are NOT produced under simple monopoly pricing, the shaded area
(1)
represents a potential gain not captured by society, i.e. deadweight loss.
Mark allocation for the diagram:
- deadweight loss
2. (a) Third-degree price discrimination refers to a situation where the seller separates
(2)
(2)
customers with different price elasticity of demand (or information costs) into two
or more groups and charges them different prices.
(b)(i) It may not be third-degree price discrimination.
The heavier the vehicle uses the tunnel, the more is the damage done on the tunnel.
(1)
(1)
Hence the costs of providing tunnel service to different vehicles are different.
However, if the differences in price and that in cost is not proportional, then it may
(1)
be price discrimination.
(ii) It is third-degree price discrimination.
(1)
Different passengers are charged at different prices by the same seller for
(1)
essentially the same service, and the differences in fares are NOT due to any cost
differential.
Different passengers face different pricing arrangement.
(c) The general conditions are (any three below):
-
(1)
(2)+(2)+(2)
The firm must have monopoly or market power, i.e., facing a downward sloping
demand curve.
-
The firm can effectively prevent resale; otherwise consumers can buy goods at lower
prices and resell at higher prices. This takes away the firm’s customers who are
charged higher prices.
-
Consumers’ willingness to pay is different. If all consumers have identical demand and
information about the good, they will pay the same price.
-
The cost of practising price discrimination cannot be too high. If such costs are higher
than its benefits, simple monopoly pricing will be a better choice.
-
Consumers have different information costs. Those who have less market information
due to higher collecting costs can possibly be charged a higher price than those who
have more market information due to lower collecting costs.
3. (a)(i) ‘Anti-competition’ means enterprises use unfair or inappropriate ways to reduce or
(2)
restrict market competition.
(a)(ii) Horizontal mergers:
(1)
the merging of firms producing the same type of goods.
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(1)
New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
Potential competition mergers:
(1)
the merging of a firm and another firm that plans to enter the market and compete
(1)
with it.
Vertical mergers:
(1)
the merging of firms which are in different production stages and have a
(1)
buyer-seller relationship.
(b) - Hindering the development of the industry: anti-competitive practices reduce the
(2)
number of competitors in the market. They damage free trade and fair competition,
and are unfavourable to the development of the industry.
- Unfavourable to consumers: Anti-competitive practices will increase monopoly,
(2)
resulting in an increase in production prices and hence consumption costs.
Moreover, the reduction in the number of competitors will leave consumers with
fewer choices, which is unfavourable to them.
- Harmful to economic efficiency: Compared with a market under perfect competition,
(2)
a monopoly has less output, creating a deadweight loss in society.
4. (a)(i) With a dominant market position, monopolists have both the ability and the
(3)
incentive to engage in anti-competitive practices to increase profits. Also,
monopolists can reduce output to raise product price. Hence in markets with only
a few firms, there is a great temptation for the firms to monopolize the market so
that they can control output and price.
(ii) Monopoly may be a result of economies of scale and elimination of weaker
competitors through competition. It is not necessarily anti-competitive and may
even be beneficial to society. In the case of natural monopoly, the average cost is
lower when there is only one producer.
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(3)
New Horizon Economics Elective Part 1
Chapters 1 - 2
Assessment 9
(b) Examples of horizontal agreement (any three below):
-
Price-fixing: an agreement between firms to fix or raise the product price to restrict
price competition and increase profits.
-
(1 mark:
name;
Sales and production quotas: an agreement among producers or suppliers to fix a sales
or production quota so that their joint reduction in output can raise the product price.
-
(3)+(3)+(3)
2 marks:
explanation)
Bid rigging or collusive bidding: firms agreeing to submit common bids to eliminate
price competition, or firms agreeing to submit the lowest bid to win the contract by
rotation and each getting a certain amount of contracts.
-
Market division in products and locations: an agreement among producers or suppliers
on the scope of operation.
-
Customer allocation: an agreement among market participants on the source of
customers such that they can divide up the market without competition.
-
Joint boycotts: an agreement among competitors not to trade with certain suppliers or
customers, or the joint effort of competitors to force suppliers or customers not to trade
with another competitor.
-
Unfair or discriminatory standards: they are standards agreed upon members of a trade
union or professional body, and deny newcomers the chance to enter or compete in the
market.
(c) Reasons (any three below):
-
(2)+(2)+(2)
To provide a legal basis for the investigation and sanctioning of anti-competitive
conduct.
-
To strengthen the competition regulatory framework in order to promote market
discipline.
-
To improve the business environment and provide a level playing-field for business.
-
To improve transparency through delineating what constitutes anti-competitive conduct
so that firms and the public are fully aware of them and can prevent them their
occurrence in society.
-
Without such regulatory regime, in the long run there might be an adverse effect on the
relative competitiveness of an economy, especially in those sectors with high entry
barriers.
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