1. (a) Outline the assumptions underlying the theory of Perfect Competition.

(b) (i) Explain, with the aid of a labelled diagram, how a firm in Perfect Competition achieves

equilibrium in the short run.

(ii) Derive and explain the short run supply curve of this firm.

(c) Discuss, with the aid of labelled diagrams, the impact which the entry of new firms would have

on the short run equilibrium of existing firms, in perfectly competitive markets, earning

supernormal profits.

(d) Firms in Perfect Competition tend not to engage in advertising.

State and explain TWO reasons why.

2. (a) (i) Draw a short-run average cost curve and a short-run marginal cost curve.

(ii) Explain the relationships between the shapes of these curves.

(b) It is generally agreed that the long-run average cost curve initially slopes downward due to

economies of scale and then slopes upward due to diseconomies of scale. These economies and

diseconomies can be both internal and external.

(i) Define the underlined terms.

(ii) Distinguish between internal and external economies of scale, giving TWO examples in

each case and explaining how each arises.

(c) Discuss the possible social costs and social benefits of the new roads being constructed

throughout Ireland.

3. (a) Define (i) Income Elasticity of Demand.

(ii) Cross Elasticity of Demand. (15 marks)

(b) (i) "Income elasticity of demand is usually positive but sometimes negative".

Explain, giving examples, the meaning of this statement.

(ii) A consumer spends 40% of income on a certain good. After the consumer's income

doubles (everything else remaining unchanged), only 30% of income is spent on the

good. State whether this good is a normal or inferior good and explain your answer.

(c) Which of the figures stated below is likely to represent:

(i) Income elasticity of demand for potatoes;

(ii) Income elasticity of demand for designer clothes;

(iii) Price elasticity of demand for airline seats.

-2.8, -0.1, + 2.5

Explain each of your choices.

(d) Income elasticity of demand for a good is +1.8 and sales in Year 1 are 20,000 units. If

consumers' incomes are expected to rise by 5% in Year 2, calculate the expected level of sales.

Show your workings.