CAVENDISH UNIVERSITY ZAMBIA

ASSIGNMENT BRIEF AND FEEDBACK FORM

STUDENT NUMBER: _ 077940___________

JANUARY 2021
INTAKE
ONE/TWO YEAR

LECTURER: Mrs. Elizabeth Munengami

Microeconomics
SUBJECT:

1
ASSIGNMENT NO.

DATE HANDED OUT: 10.05.2021

DATE DUE IN: 30.05.2021

DAY/EVE/DL DL

ASSIGNMENT BRIEF

GIVEN SHOULD BE IN THIS BOX

DETAILS OF THE ASSIGNMENT

Question and answer assignment.

STUDENT INSTRUCTIONS:

1. This form must be attached to the front of your assignment

2. The assignment must be handed in without fail by the submission date (see assessment schedule for your
course)
3. Ensure that the submission form is date stamped by the reception staff when you hand it in
4. Late submission will not be entertained unless with prior agreement with the subject tutor
5. All assessable assignments must be word processed

ASSIGNMENT GUIDANCE
This assignment is intended to assess the student’s knowledge in all of the
following areas. However, greater emphasis should be given to those items
marked with a

(Tutor: - please tick as applicable)

ASSESSABLE SKILLS Please Tick.

Good and adequate interpretation of the questions

Knowledge and application of the relevant theories

Use of relevant and practical examples to back up theories

Ability to transfer and relate subject topics to each other

Application or use of appropriate models

Evidence of library research

Knowledge of theories

Written Business English communication skills

Use of visual (graphs) communications

 Self-Assessed ‘time management’

Evidence of field research

Tutor’s Mark Contribution

MARKS
(Administration only*)

LECTURERS FEEDBACK:

Q.1

*
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a) Compare and contrast between the two extreme cases of price elasticity. (6marks)

There are two extreme cases of elasticity: when elasticity equals zero and when it is infinite.
Infinite elasticity or perfect elasticity refers to the extreme case where either the quantity
demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price
at all. While perfectly elastic supply curves are for the most part unrealistic, goods with readily
available inputs and whose production can easily expand will feature highly elastic supply curves.
Examples include pizza, bread, books, and pencils. Similarly, perfectly elastic demand is an
extreme example. However, luxury goods, items that take a large share of individuals’ income,
and goods with many substitutes are likely to have highly elastic demand curves. Examples of such
goods are Caribbean cruises and sports vehicles. Both perfect elasticity and perfectly inelastic are
types of elasticity

b) Which of the two is more applicable in Zambia, give examples (7 marks)

Perfectly inelastic demand is the situation where there no change in quantity demanded even there
is change in price of the goods, the the demand is said to be perfectly inelastic. Simply mean no
change in demand for change in price. An example of perfectly inelastic demand would be a
lifesaving drug that people will pay any price to obtain. Even if the price of the drug would increase
dramatically, the quantity demanded would remain unchanged.
c) Distinguish graphically the Short Run (SR) analysis of a firm operating under monopoly
and monopolistic market structures. (10 marks)

Monopoly is a market structure characterized by a single seller, selling a unique product in the
market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods
with no close substitute.

A monopolistic market structure has the features of a pure monopoly, where a single company
fully controls the market and determines the supply and price of a product or service. Hence,
a monopolistic market is a non-competitive market. Monopolistic markets are markets where a
certain product or service is offered by only one company. A monopolistic market structure has
the features of a pure monopoly, where a single company fully controls the market and determines
the supply and price of a product or service. Hence, a monopolistic market is a non-competitive
market.
Q.2

a) The demand of a product will always determine the price of that commodity. (4marks)

Demand is an economic principle referring to a consumer's desire to purchase goods and services
and willingness to pay a price for a specific good or service. Holding all other factors constant, an
increase in the price of a good or service will decrease the quantity demanded, and vice versa.
Market demand is the total quantity demanded across all consumers in a market for a given good.
Aggregate demand is the total demand for all goods and services in an economy.

The law of supply and demand is an economic theory that explains how supply and demand are
related to each other and how that relationship affects the price of goods and services. It's a
fundamental economic principle that when supply exceeds demand for a good or service, prices
fall. When demand exceeds supply, prices tend to rise. There is an inverse relationship between
the supply and prices of goods and services when demand is unchanged. If there is an increase in
supply for goods and services while demand remains the same, prices tend to fall to a
lower equilibrium price and a higher equilibrium quantity of goods and services. If there is a
decrease in supply of goods and services while demand remains the same, prices tend to rise to a
higher equilibrium price and a lower quantity of goods and services. The same inverse relationship
holds for the demand for goods and services. However, when demand increases and supply
remains the same, the higher demand leads to a higher equilibrium price and vice versa.
b) One of the most important determinants of a consumer’s behavior is his or her tastes or
preferences. Discuss the three (3) basic assumptions that economists make about the nature
of the consumer’s tastes. (5 marks)

The first assumption is called completeness, which is when the consumer does not have
indifference between two goods. If faced with apples versus oranges, every consumer does have a
preference for one good over the other. For example, Eddie has two alternative choices: steak or
chicken. The assumption of completeness reflects the idea that Eddie should be able to compare
his options, in this case steak and chicken. In other words, Eddie should be able to say whether he
likes steak or chicken better.

The second assumption is called transitivity, which is based on defining a relationship between
goods, such as if a consumer prefers good A to good B, and prefers good B to good C, then the
consumer should prefer good A to good C. Let's use Eddie's food selections as another example.
If Eddie prefers steak (good A) to chicken (good B), and prefers chicken (good B) to turkey (good
C), then Eddie should prefer steak (good A) to turkey (good C).
The last consumer assumption is based on non-satiation, which states that more of a good is always
better as long as it does not affect the consumer's ability to utilize all other goods. Eddie will be
happier with 6 steaks and 2 chickens, than 4 steaks and 1 chicken. Eddie has no point of satiation
or the ability to be satisfied. Some economists call this assumption consumer greed. Consumer
preference is critical to economics because of the relationships between preferences and consumer
demand curves. It is important to understand what Eddie and other consumers prefer to spend their
income on which will help predict consumer demand. The purpose in understanding the consumer
choice theory is a way of analyzing how consumers may achieve equilibrium between preferences
and expenditures by maximizing utility or satisfaction in terms of their consumer budget limits.

c) Distinguish perfect competition, monopoly, and monopolistic competition markets with

reference to the following:

i) Number of firms in the market (4 marks)

In perfect competition, firms can enter or exit the market without cost and it has no one sole
competitor. In monopoly market structure there is a single seller. In monopolistic competition
markets, firms can enter or exit the market without or with minimal costs

ii) Nature of the goods produced (4 marks)

In perfect competition, all firms sell an identical product (the product is a "commodity" or
"homogeneous"). A monopoly exists when a specific person or enterprise is the only supplier of a
particular good. In monopolistic competition markets, there are similar but differentiated goods.

iii) Freedom of entry and exit in the market (4 marks)

In perfect competition, Firms can enter or exit the market without cost. In monopoly market
structure, there is high barriers to entry. In monopolistic competition markets there is freedom to
enter or leave the market, as there are no major barriers to entry or exit.
iv) Influence on the price of goods produced. (4 marks)

In perfect competition, all firms are price takers (they cannot influence the market price of their
product) and market share has no influence on prices. In monopoly market structure, there is price
discrimination. In monopolistic competition markets, Firms are price makers; each firm makes
independent decisions about price based on its product, its market, and its costs of production.

Q.3

a) Explain the shut – down of a perfectly competitive firm in the short run, illustrate your
answer graphically. (5 marks)

A firm should continue to operate if price exceeds average variable costs. When determining
whether to shut-down a firm, one has to compare the total revenue to the total variable costs. If
the revenue the firm is making is greater than the variable cost (R>VC) then the firm is covering
its variable costs and there is additional revenue partially or entirely cover the fixed costs. On the
other hand, if the variable cost is greater than the revenue being made (VC>R) then the firm is
not even covering production costs and it should be shutdown immediately.

b) A market consists of three consumers whose demand curves are: P= 35-0.5Qa; P= 50-
0.25Qb; and P= 40-2Qc. Calculate the market demand for the commodity and the
equilibrium output and price if the supply function is given by Qs= 40+3.5P. (8 marks)

MARKET DEMAND =290-6.5P

Qd= 290-6.5P
Qs= 40+3.5P.

Qd=Qs

P=25

Q=127.5

c) Illustrate your answer graphically, does it represent a surplus or a shortage. (7 marks)

d) Calculate the Total Revenue. (5 marks)

TR=PQ
TR=3187.5

Q.4
a) Compare and contrast between accounting costs and economical costs. (6 marks)

Accounting cost is the recorded cost of an activity. An accounting cost is recorded in the ledgers
of a business, so the cost appears in an entity's financial statements. Economic cost is the
combination of losses of any goods that have a value attached to them by any one
individual. Economic cost differs from accounting cost because it includes opportunity cost.
Accounting costs represent anything your business has paid for. You can calculate accounting
cost by subtracting your expenses from your revenue. Economic costs represent any “what-if”
scenarios for your business. You can calculate economic cost by subtracting implicit costs from
your accounting cost.

b) Complete the table below by calculating the Total Variable Cost (TVC), Average Fixed
Cost (AFC), Average Variable Cost (AVC) and the Marginal Cost (MC). (17 marks)

Output Total Cost Total Fixed Total Average Average Marginal

(TC) Cost (TFC) Variable Fixed Cost Variable Cost
Cost (TVC) (AFC) Cost (MC)
(AVC)
TC-TFC TFC/Q ∆TC/∆Q
TVC/Q

0 50 50 0 - - -

1 70 50 20 50 20 20

2 100 50 50 25 25 30

3 120 50 70 16.67 23.33 20

4 135 50 85 12.5 12.25 15

5 150 50 100 10 20 15