Answer to Question #206070 in Microeconomics for Nablis

Question

1. Discuss the factors that determine the income elasticity of demand.

2. Explain the conditions for oligopoly market structure to exist.

3. What is increasing returns to scale? and describe at least three causes of

increasing returns to scale?

4. What is the relation between productivity and cost? Describe the association

using equations for MC & MP, and AP & AC

5. Do monopoly firms get a normal profit or supernormal profit in the short run?

Explain how?

Answer 1

(1) Nature of the commodity: Commodities are categorized as necessities, comforts, and luxuries. For necessities, EY<1, comforts EY=1, and luxuries EY>1.

Time: Consumption patterns of people may change over the long run with changes in income. A luxury today may become a necessity after some years.

Frequency of increase in income: The greater the frequency the higher the income elasticity will be.

(2) The existence of an oligopoly market requires few available firms to gain market power and prevent smaller firms from entering the market.

(3) Increasing returns of scale refer to the situation where output increases in greater portion than the output.

Causes of increasing returns to scale

Indivisibility of factors of production.

 The indivisibility of lumpiness of factors of production increases returns of scale.

Division of labor.

Division of labor and specialization reduces the cost of production thereby increasing the returns of scale.

Internal and external economies of scale. These relate to production, finance, and marketing. This reduces the cost of production.

(4) Productivity is an indicator that measures labor efficiency in producing goods and services while cost is an indicator that measures the unit of the labor cost of producing each unit of output.

MC=MP (MC is at maximum at the same output which MP is at.)

 AP=AC (AC is at maximum at the same output which AP is at.)

(5) Monopolies earn both natural and supernatural profits.

Monopolies earn supernatural profit in the short run because the seller has control over the prices and there is no entry of new firms.