2019 Economics WAEC (WASSCE) Theory Past Questions (Paper 2)

Question 1

The diagram below represents the equilibrium position of a firm in a perfectly competitive industry. Study it carefully and answer the questions that follow

a (i) At what level of output and prices is the firm in equilibrium?

Solution

The firm is in equilibrium where MR = MC. Therefore, equilibrium output is 50kg and equilibrium price is $20.00

(ii) Calculate the firm’s profit in equilibrium

Firm’s profit (π) = TR – TC

Solution

 TR = Price × Quantity

 = $20 × 50kg = $1000

 TC = ATC    output (quantity)

 = $12  × 50 = $600

∴ Profit(π) = $1000 – $600 = $400

(iii) What type of profit is it? Explain your answer

Solution

Abnormal profit or supernormal profit. This is because the profit is earned at a point where price (AR) is greater than AC

(b) Why is the average revenue (AR) function horizontal

Solution

The average revenue function is horizontal because, in perfect competition, AR, which is also the price is constant or fixed

(c) State any two ways in which marginal cost (MC) and average total cost (ATC) are related

Solution

(i) When MC is less than ATC, ATC is falling 

(ii) When MC is equal to ATC, ATC is at minimum

(iii) When MC is greater than ATC, ATC is rising