Under this particular report micro economics need to be studied which is that part of economics which help to seek influence of single factor and then its effect on individual decision making. There would be analysis of market structure like that of oligopoly and what are the reasons as to why monopolistic firm would also be included within this.

Question 1

(a) What market structure is used to benchmark allocative efficiency and why do we use it?

There are many types of markets that are there into economy like that of perfect competition, monopoly, monopolistic firms and oligopoly. All are having their own features and characteristics which are defining them in various terms (Clements, 2015). As the number of buyers are very much who are having their demands which vary from each other but the seller would be facing problems like that of allocative efficiency (Allocative Efficiency, 2018). This is that state of any economy that is indicating the preference of consumer of each good and services that are been produced up to point of marginal benefits. This is clearly done into perfect competition firm which is using the benchmark allocative efficiency as there would a point of equilibrium at which all quantity supplied are equal to that of quantity demanded at those points. This would be known to as Pareto optimum which means that no one single firm is making any better exchange of goods and no other firm is at loss (Dimitrienko and Dimitrienko, 2016). This is used so that there is an optimum distribution of goods and services which is after considering preference or demand of customers.

(b) Why and how do monopolistic ally competitive firms fail to achieve allocative efficiency?

The price of goods and services of monopolistic competitive firm would always be higher than its marginal cost and the consumer surplus is less than that of perfectly competition markets this is the reason as to why monopolistic firm is not able to achieve allocation efficiency (Dimitrienko and Dimitrienko, 2016). The price of all goods in monopolistic market would be higher that its marginal cost reason been there are number of buyers but there is only one single seller of that product. So if that seller is setting their price more than that of marginal cost than also it is possible that customers are purchasing that product. This is main reason as to why monopolistic firm would be failing to achieve allocative efficiency into market.

Question 2

(a) What is the impact of collusion into Oligopoly markets on allocation of factors of production?

If there are number of buyers are sellers are in very small number only as there are limited number of sellers selling that particular products then this type of market would be known to as oligopoly market (Fred, 2017). Under this type of market all firms is forming collusion which is called to ask group of those firms in market to avoid price cutting. Then they decide the output price and quantities of products so that competition is not too high this behaviour would be affecting the allocation of all factors of production. The price of this oligopoly marketer is always laying between the price of perfect competition and that of monopoly. It is seen that if there is any change in market policy of any one firm than this would be affecting change in policy of competitor firm as well. There would be huge waste of factors of production which is arising after the price war between firms (Fred, 2017).

(b) What is the consequence of any one firm cheating on the other one?

There is chance of one firm cheating one the other firm into collusion as in many countries of world this collusion as illegal as on case of USA. A firm could be gaining from cheating on other in terms of cartel agreement by doing increasing production or selling more number of products (Greenstein, 2017). As this is illegal in many parts of world but still they could form collusion in secretive bases which would be limiting competition among all of them and could also mislead or defrauds each other. But there are no such legal consequence could be taken as it is illegal on terms of collusion so they could be imposing penalty on that firm which is cheating on to other.

Question 3

(a) How would monopoly into market can maintain an inefficient allocation of resources?

Significant wasteful aspects related with restraining infrastructures include:

Allocative wastefulness- costs will have a tendency to be higher, and yield lowers, than what might exist in a market with low hindrances to passage (Martini, 2017). Costs will have a tendency to be higher than both negligible expenses and normal aggregate cost.

Weakened showcase powers- when buyers of an item have numerous choices, makers must serve their clients productively keeping in mind the end goal to remain in business. On the off chance that buyers can't buy focused items effortlessly, the monopolist doesn't have to stress a great deal over losing clients when poor administration or a low quality great is given.

Rent or support looking for- firms and additionally people will put a lot of exertion into acquiring or keeping up high section obstructions; thusly, they want to accomplish imposing business model compose benefits. Such endeavours enhance a few people, to the detriment of numerous others.

(b) Advantages of monopoly and disadvantages.

Monopoly is having the greatest advantages as to that of setting up of price and output produced by themselves only as they are only one firm in market which can produce or sell that products and service in market (Mefford, 2017). They are always having supernormal profits which tell that they are having more profits as per their set targets thus allowing them to invest more amount into their research and development part.

But on the other hand they are also having disadvantages which include that of production of less output on the same level of price and then charging higher price from customers. This higher price would be having lowered in customer surplus and dead weight welfare loss thus leading to allocative inefficiency and supernormal profits (Mohammadi and Rezvani, 2017).

Question 4

(a) Explain how a firm's marginal costs of production are at a minimum when its marginal product is at a maximum?

The marginal cost curve of firm is U shaped including that increasing part of that curve would be equal to decreasing part of marginal product curve. On the other hand decreasing part would be corresponding the increasing part of marginal cost curve and at the point when MP is at highest this would be meaning that MC curve would be at lowest or minimum point. At this point when firm is producing the highest level of output that too at the lowest cost of that product. The main reason behind this could be included as that which is due to variable cost being linked with cost that of variable input in short run (Ritthithit and, 2018). At this short run period it is easy for firm to identify what is the link between MP and MC curve. This is defined into the diminishing marginal returns which is telling relationship between MP and MC curve.

Like in the above figure it would be included that the point at which MC is at its lowest could be that at which MP is at its maximum (Tripathi, Tripathi and Koutsoyiannis, 2017). When MC is tend to decrease this would be resulting in increase of MP as less the cost of production higher would be the product produced.

(b) Explain how a firm's long-run average cost curve comes into existence from a multi-plant operation?

Long term or long run could be defined to as that time when firm is able to adjust or change almost all its factors of production including labour, land and capital. As at this time period firm is having plenty of time and resources to sort out differences in their level of production (Villanova and, 2018). The long run Average total cost of firm and its curve would be having 3 various stages of its production namely economies of scale, diseconomies of scale and constant returns to scale. This in tern of a multi plant operation firm would be look this the below figure

Like in this figure is the firm at the starting stage is opening few plants then firm would be experiencing ATC would be declining as it increase number of plants then ATC would be constant and if it is increased to more higher number then this would be indicating as rise in ATC curve (Ritthithit and, 2018).

(c) Explaining the diagram.

Economies of scale: in this stage as per the above diagram firm is increasing and growing into market tend to open more new factories and having low total average cost. So if the firm is having more number of factories and plants they would be having lower average total cost an business would also be growing (Tripathi, Tripathi and Koutsoyiannis, 2017).

Constant return to scale: this is that stage at which more number of plants would not be getting them higher or better return to scale as this would be normal only. The total output of the firm would be minimizing long run average total cost firm is continue to grow but at lower rate.

Diseconomies of scale: at the time when any firm in market is becoming too big at that time they tend to fall down due to inefficacy which would be rising from mismanagement or any other reason.

Question 5

Explaining the market mechanisms used for controlling pollution as an externality?

Market mechanisms would be defined as use of money as exchange medium between sellers and buyers with an open market system. This could be seen in both free and captive markets and then telling about supply and demand of goods and services and charging of scarcity and production possibilities (Mohammadi and Rezvani, 2017). Externality could be defined to as that external factor that is affecting any factor of production or to that production level of products in any firm like that of government subsidiaries given to small farmers. Pollution would also be affecting production level in agriculture and farmers decision to produce more or avoid soil erosion (Mefford, 2017).


  • Clements, M. W., 2015. Essays in asset pricing and applied micro-economics. University of Pennsylvania.
  • Dimitrienko, Y. I. and Dimitrienko, O. Y., 2016. Application of High Dimensional Continuum Mechanics to Micro-Economics. Applied Mathematical Sciences. 10(61). pp.3019-3027.
  • Dimitrienko, Y. I. and Dimitrienko, O. Y., 2016. Application of High Dimensional Continuum Mechanics to Micro-Economics. Applied Mathematical Sciences. 10(61). pp.3019-3027.
  • Fred, Y. Y., 2017. A probe into the unification of micro-macro-economics: Arrow-Debreu-Mundell-Fleming model as a standard model. In Scientific Metrics: Towards Analytical and Quantitative Sciences (pp. 85-94). Springer, Singapore.
  • Fred, Y. Y., 2017. The commodity-money analytical framework: a unified approach to micro-macro-economics and complex economics. In Scientific Metrics: Towards Analytical and Quantitative Sciences (pp. 95-106). Springer, Singapore.
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