Date 1. (a)Circumstance under which an economist would advice a firm making accounting profits to close down Profits in any company are the value arrived at when the total costs are subtracted from the revenues. Costs include both implicit costs and explicit costs…
An economist would advice a firm making accounting profits to close down because accounting profits is arrived at by subtracting only explicit costs from the total revenue. This rejects implicit costs hence inaccuracy of the profits (Aspers, 2011). (b) Why normal profit is the long run outcome for a firm under perfect competition When a firm is making economic profits, other firms will find the markets competitive hence mass entry into the market. This causes the supply curve to shift to the right, which results into a drop of the prices hence profits, are cancelled. The firm will in the end exhibit normal profits as an outcome under perfect competition (Aspers, 2011). (c) Characteristics of both monopolistic and monopoly competition, their advantages and disadvantages Characteristics of monopolistic competition are; there exist a large number of buyers and sellers, they exhibit price differentiation, free entry and exit of firms and high selling costs are incurred. Monopoly on the other hand exhibits characteristics such as the existence of only one firm in the market; they are price takers since they are the only producers. They have the advantage of controlling the whole market and therefore dictate the prices. The only disadvantage is that they are constrained by their own demand curves. Monopolistic case has several advantages; the most peculiar is that they are able to command a large market base. The market is disadvantaged in that stiff competition may threaten its operations in the market (Aspers, 2011). 4. (a) Graph of Fiscal policy and deflationary gap Deflationary gap happens when the actual output (Y) is below the natural output (Yn); this is as shown in the figure above. To correct the deflationary gap expansionary fiscal policy has to be used. The government does this through increasing government spending; alongside this, the government taxation has to be reduced. The result of employing the expansionary fiscal policy acts to shift the aggregate demand curve to coincide with the natural output and therefore real GDP is increased. Deflationary gap is caused when the investment spending goes down hence it is simply solved when the government increases it investment spending such as spending on infrastructure (Buti, 2003). (b) How fiscal and monetary used to address deflationary gap affects balance of payment Fiscal policy tools used to such as increased taxation will make the costs of local goods to be expensive. When the local goods become expensive balance shifts from favoring importation. When imports are more than exports, there is unfavorable balance of payment, which is harmful to the economy. In addition, monetary policies to correct deflationary gap is that aimed at increasing money supply, which leads to an increase in prices. Increase in prices causes local goods to be equally expensive leading to increased importation hence unfavorable balance of payment. Such negative impacts of balance of payment occur when the economy is at the helm of growth (Buti, 2003). 6. (a) Reasons for holding money There are three major reasons for holding money; transactionery motive, precautionary motive and speculative motive. For transactionery motive, money is held to undertake daily transactions mostly on basics. Money is also held to handle any future unfortunate occurrences anticipated in the future. Speculators are investors who anticipate that assets will be attractive in the near future hence hold money to take advantage of such (Dobeck, MF & ...
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