CJC H2 Prelim 2024 P2 Solutions

Question1 1. Several majorfirmsdominatetheelectricvehiclemarket,includingTesla,BuildYourDreams,Nio,andGeneralMotors.Teslafinancialsuccessandcontinuousinnovationmakeitchallengingfornewentrantstocompeteeffectively. (a) Explainhoweconomictheorysuggestsfirmswouldsetpricestomaximiseprofitsandwhyelectricvehiclefirmsmaychargedifferentpricesforthesamegoodindifferent markets.[10] (b) Discuss whether an electric vehicle firm’s profit level is always due to thepresence of high barriers to entry.[15] Parta QuestionInterpretation Command “Explainhow…”–toelaborateindetail“Explainwhy…”–toelaborateonthereasons Content Firmsdetermineprofit-maximizingoutputatMC=MRandsetitspriceReasonsforpricediscrimination● ToraisetotalprofitthroughcapturinghigherTRindifferentmarkets● Togainmarketshareinanewmarket Context EVmarketforR2Approach Introduction BodyR1:Afirmdeterminepricesbysettingthepricebasedonitsdemandcurveatprofit-maximisingoutput,whereMC=MR. R2: EVfirmsadopt pricediscriminationinorder toincreaseprofits, byincreasingrevenue. Conclusion SuggestedAnswer Part Description RemarksIntroduction Firms are assumed to profit maximizingwhereMC=MRusing the marginalist approach and thisessaywill also Provide anoverviewstatement.

explain why firms in the electric vehicle market pricediscriminate. Body-R1 Producers of electric vehicles operate in a competitiveoligopolisticmarket structure. Giventhat theypossessasignificantportionofthemarketshare,theyarepricesettersandhavetheabilitytoset priceswheretheirdemandislargeandrelativelypriceinelastic. Hence, assumingtheyare maximizing profits, the firm will set price atprofit-maximizing output where MC = MR, using themarginalistprinciple.Tomaximizeprofit,thefirmwillproducetheoutputatwhichMR=MCwhereMCcutstheMRcurvefrombelow.ThiswillresultinequilibriumpricePeandquantityQeasshowninthediagrambelow. Thusthiswill reapmaximumprofitPeABEforthefirm. At output levelsbelowQe,MRexceedsMCandthusthefirmshouldincreaseoutputastheextraunitaddsmoretototalrevenuethantototalcost,contributingtohigherprofits. AtoutputlevelsaboveQe,MCexceedsMR.Sincethelastunitaddsmoretototalcostthantototalrevenue,thefirmshouldreduceoutputlevelstoincreaseprofits. Hence, using the marginalist principle, the firm shouldproduceat OQewhereMC=MRandMCcutsMRfrombelowtoenjoyprofitmaximisation. At this profit-maximising profit Qe, the firmwill set thehighest pricethat consumersarewillingandabletopaybasedonthefirm’sdemandcurve,thatisPeinthiscase.Asaresult,thefirmisalsoearningsupernormalprofitsofAPeEB. - Body-R2 Pricediscriminationoccurswhenaproducersellsthesamecommoditytodifferentbuyersatdifferentprices,forreasonsnot associatedwithdifferencesincost. Firmschoosetoadopt pricediscriminationinorder to(i)raisetotal profitthroughcapturinghigherrevenuegiventhesameoutputor(ii)toexpandmarkets. ©CatholicJuniorCollege 9570/02JC2PRELIMINARYEXAMINATION/2024

Topracticepricediscrimination,firmsneedtohavemarketpower to set price, abletosegment themarket andtoprevent resale of goods from low-priced mark