Question 1

Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio.

a)Draw the demand curve faced by the firm and its marginal revenue curve. Also draw Shower Power's marginal cost and average total cost curves.(9,33 marks)

b)What quantity of radios should Shower Power produce to maximize its profit? What price should it charge?(8 marks)

c)What is the firm's short-run economic profit or loss?(8 marks)

d)In the long run, what will happen to the demand for Shower Power's radios, the quantity of radios sold, the price charged, and the firm's economic profit?(8 marks)

Question 2

Two arguments used to promote trade barriers are the infant-industry argument, and the dumping argument. Explain each of these arguments and discuss their potential flaws.(33,33 marks)

Question 3

Suppose the European economy experiences low growth rates. Write a letter to the newly appointed Chairman of the Central Bank suggesting how the Central Bank might help boost the European economy. Be sure to explain how a change in monetary policy will affect economic activity. Relate, compare and contrast your answer to the present monetary policy followed by the Chairman of European Central Bank with respect to Eurozone's present performance .