HCI 2022 Econs Suggested Essay Answers (students) updated

Suggested Answers to A Level 2022 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Question 1 Economists usually begin their analysis of decision-making by firms by assuming that the objective of a firm is to maximise its profit. In reality, however, there are many different objectives that a firm might adopt. (a) Explain the likely effects on a firm’s price and output when its objective changes from profit maximisation to profit satisficing. [10] (b) Discuss the most appropriate strategy that a firm could adopt if its objective was to reduce the competition that it faces. [15] Part (a) Introduction Firms are assumed to be profit-maximisers and they will set their price and output according to the profit-maximising condition where MR=MC. However, objectives may change depending on various factors like the contestability of the industry and dynamic economic conditions. A firm may also decide to focus on other objectives such as maximise its sales volume in order to gain market share and as an entry deterrence strategy. R1: Explain why profit maximization requires MC = MR using a price setting diagram In the diagram above, the firm would choose to maximise profits by producing where MR=MC, producing at Qe and pricing at Pe. If the firm produces below Qe, say at Q1 and prices at P1 where MR>MC, the additional revenue gained would be the area ABQeQ1 while the additional cost would be CBQeQ1. Since ABQeQ1>CBQeQ1, a rational firm would be able to gain additional profit by increasing production and moving closer to Qe and Pe. If the firm produces above Qe, say at Q2 and prices at P2 where MR<MC, the additional revenue gained would be the area BEQ2Qe while the additional cost would be BDQ2Qe. Since BEQ2Qe<BDQ2Qe, a rational firm would be able to gain additional profit by decreasing production and moving closer to Qe and Pe. Price/Revenue/Cost ($) MC P1 Pe P2 A B D AR C E MR Qe Output Q1 Q2 0

Suggested Answers to A Level 2022 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit R2: Explain why profit satisficing often leads to a lower price and higher output A profit satisficing firm is satisfied with a level of profits as the firm seeks to attain other objectives such as sales volume maximisation or revenue maximisation. A firm seeking a sales volume maximisation strategy would produce as much as it can but it would not go beyond the breakeven output and price of Qv and Pv respectively. At Qv and Pv, TR=TC at PvAQv0. This means that the firm is achieving at least normal profits and is thus able to remain in the industry while at the same time maximising its sales volume. Hence, as a firm changes from a profit maximising strategy to a sales volume maximisation strategy, Pv is larger than Pe and Qv is greater than Qe. However, the firm may revert to the profit maximising price and quantity, Pe and Qe respectively, to maximise pro