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Economics Paper 2, May/June 2007  
Questions: 1 2 3 4 5 6 7 8 9 10 11 12 Main
General Comments
Weakness/Remedies
Strength









































Question 2


Study the diagram below carefully and use the given information toanswer the questions that follow.

Determne: (i) The profit maximizing output;
(ii) the firm's profit if it produces 600 units of output;
(iii) the total cost if the firm produces 400 units.

Calculate the:
total revenue;
profit of the firm at the output level of 900 units.
(c) What will happen if a firm's market price falls below its average variable cost?

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OBSERVATION

This question required a proper understanding of the theory of the firm. The question was not popular with the candidates as only a few attempted it.
The performance of the candiddates was below average.
The profit maximizing output level is 900 because at this level MC = MR.
At the output level of 600 units the Profit = TR - TC = $6000 - $3600 = $2400.00
At the output level of 900 units the total revenue is $10 x 900 = $9000 while the profit is TR - TC = $9000 - $7200 = $1800.
The good candidates correctly stated that the firm will eventually close down if the firm's market price fall below its average variable cost.

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