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ECS2601 ASSIGNMENT 02 ; 2021 ANSWERS WITH ELABORATIONS
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ECS2601 ASSIGNMENT 02 ; 2021 ANSWERS WITH ELABORATIONS
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ECS2601 ; 2021ASSIGNMENT 02
UNIQUE NUMBER 700643
Prepare by Ranga 0618441387
1. A firm’s primary objective is
[1] To maximize profits and minimise costs.
[2] To minimize total costs and improve output.
[3] To maximize total revenue and minimise loss.
[4] to minimize marginal cost and maximise marginal revenue.
Explanation: In the conventional theory of the firm, the principal objective of a business firm is
profit maximization
2. Khalid used to be a DJ earning R500 000 a year, but he now works as a plumber. Each year,
his direct costs are R185 000. This includes the annual electricity, water and levy bill of R82
000, and annual rent of R75 000. He has R120 000 of financial capital tied up in the business
throughout the whole year, and the market interest rate is 8.5%. His annual revenue as a
plumber is R900 000. Which of the following statements is correct?
[1] Khalid is breaking even.
[2] Khalid is making economic profit of R95 000.
[3] Khalid is making economic profit of R204 800.
[4] Khalid is making economic loss of R62 000.
Use the diagram below for a firm operating in a perfectly competitive market and answer the
question that follows.
2
, ECS2601/101/3/2021
3. At what price level must the firm shut down in the short run?
[1] At a price below P1.
[2] At a price below P2.
[3] At a price below P3.
[4] At a price above P3.
Explanation: A continuation of the shutdown rule states that in the short run, fixed costs are
considered as sunk costs. Hence, it should not be considered in the decision of whether to shut
down or continue with operations. In addition, in the short run, if the firm’s total revenue is less
than variable costs, the firm should shut down.NB; at price below p3 –price will be less than AVC.
4. Which of the following statements is/are correct about a firm operating in a perfectly competitive
market?
[1] The market price is given by the firm’s average variable cost.
[2] The firm has perfect information and consumers have imperfect information.
[3] The level of production efficiency is greater in the long run than in the short run.
[4] The firm faces the same demand schedule as its marginal revenue.
Explanation: Diagram: where demand=marginal revenue.
Use the following information to answer questions 5, 6 and 7.
The market demand and supply for renting apartments in the Midrand area is given as:
Demand:
Supply:
3
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