SECTION B Of IGNOU MEC Solved Assignment 2022
Answer the following questions in about 400 words each. Each question carries 12 marks.
What is excess capacity and how is it related to the model of monopolistic competition?
Excess capacity refers to the difference between a firm’s actual production level and its maximum potential production level. In other words, it is the amount of production capacity that a firm has but is not using.
Excess capacity is commonly associated with the model of monopolistic competition, which describes a market structure in which there are many firms that produce similar but not identical products. In this model, firms have some degree of market power due to product differentiation, but they face significant competition from other firms.
One of the key characteristics of monopolistic competition is that firms have excess capacity because they are unable to sell all of the products that they are able to produce. This is because each firm’s demand curve is relatively elastic, meaning that consumers are sensitive to price changes and will switch to a substitute product if the price of the original product becomes too high. As a result, firms must keep their prices relatively low in order to remain competitive, which limits their ability to sell all of their output at a profit.
Excess capacity can lead to a number of economic consequences, including increased price competition among firms, slower industry growth, and reduced profits. It can also lead to inefficiencies in resource allocation, as firms may not be able to fully utilize their production capacity.
Overall, excess capacity is an important concept in the model of monopolistic competition, as it helps to explain why firms in this market structure may not produce at their full capacity and why they may face limits on their profits.
Demand function and supply function are given as P=25-X2 and P=2X+1 respectively, to find out the producer surplus and consumer surplus.
To find the producer surplus and consumer surplus in a market with the given demand and supply functions, you can use the following steps:
- Determine the equilibrium price and quantity: The equilibrium price and quantity are the price and quantity at which the quantity demanded is equal to the quantity supplied. You can find the equilibrium price and quantity by solving the demand and supply equations simultaneously. In this case, the demand function is P = 25 – X^2 and the supply function is P = 2X + 1. Solving these equations simultaneously gives us X = 2.5 and P = 11.5.
- Calculate the producer surplus: The producer surplus is the difference between the price at which a good is sold and the cost of producing it. In this case, the producer surplus is the difference between the equilibrium price (11.5) and the cost of producing the good (2X + 1). Assuming that the cost of production is a linear function of X, the producer surplus can be calculated as follows:
Producer surplus = (11.5 – 2 * 2.5 – 1) * 2.5 = 15.75
- Calculate the consumer surplus: The consumer surplus is the difference between the price that a consumer is willing to pay for a good and the price they actually pay for it. In this case, the consumer surplus is the difference between the price that consumers are willing to pay (as determined by the demand function) and the equilibrium price. The consumer surplus can be calculated as follows:
Consumer surplus = ∫(25 – X^2 – 11.5) dx from 0 to 2.5
Solving this integral gives us a consumer surplus of 56.25.
Overall, the producer surplus in this market is 15.75, and the consumer surplus is 56.25. These values represent the total surplus received by producers and consumers in the market, respectively.
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