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NAME: JIMOH IBRAHIM
DEPARTMENT: ACCOUNTING
COLLEGE: S.M.S
MATRIC NO: 13/SMS02/021
COURSE: ECO201
AN INTRODUCTION TO MODERN MICROECONOMICS
(Page 80, Q 3&5)
#3.
The substitution effect of an increase in the price of rice on
households’ demand, if the price of rice has risen beyond bearable
proportions, the quality demand will fall via the substitution effect
Hence, the consumer will reduce her demand for rice and buy more of
other commodities. The substitution effect of the increase in the price of
rice Is the fall in the quantity demand of rice that was motivated by the
decrease in the relative price of other goods.
WHILE
The income effect of an increase in the price of rice on households’
demand, if the price of rice increase, the implication is that a given
amount of the consumer’s income previously expended on rice can now
buy less of the commodity, technically we say that the rise in price leads
to decrease in the consumer’s purchasing power.
#5.
Engel curve can be defined as the curve used to depict the
relationship between the income of the consumer and the quantity of a
commodity that is purchased. It was named after Earnest Engel, a
nineteenth century economist.
(I)
For a normal goods, the Engel curve is upward-sloping.
(II)
For an inferior goods, it is downward-sloping.
(Page 172, Q 4, 7&8)
#4. The law of diminishing returns is at best a short run phenomenon.
First, for a firm to be able to employ the knowledge of the law of
diminishing returns in its profit maximization or loss minimization
decisions, it must be able to measure the productivity of each of the
factor inputs employed. However, since capital is fixed in the short run,
and hence its productivity cannot be measured directly, the average
product of labour, is usually taken as a measures of the efficiency of
labour while the total product of labour is used as a proxy to measure the
efficiency of the fixed factor (capital or land).
Given the behaviour of the short run productivity curves, we can
distinguish three stages in the production process of the firm in the short
run. In stage I, both the AP and TP curves are rising. That is the
efficiency of the fixed and variable factors is increasing.
In stage II, there is decreasing average and marginal productivity of the
variable factor, but marginal product is still positive because total
productivity continues to rise, though at a decreasing rate.
However stage III, constitutes an inefficient combination of both factors.
Consequently, no rational producer will produce in this stage.
#7. An Isocost is the locus of various combinations of factor inputs that give the
same level of expenditure (cost).
It can be derive from a give firm’s budget constraint, where by it is a downward
sloping straight line intercepting the labour and capital axis at their maximum
possible level of purchase.
#Firm’s output maximizing decision subject to a cost constraint using the tools of
ISOQUANT, an isoquant is a curve that defines the locus of various combinations
of factor inputs that gives the same level of output. Using the tools of isoquant, we
assume that a firm has two factors (capital & labour), both variables in the long run
and hence substitutable because of the principle of diminishing marginal rate of
technical substitution of one factor for the other.
But using the tools of ISOCOST, the slope of the isocost curve is given by the
ratio of the factor prices. So, if the firm decides to use only labour in the process,
the total units of labour that can be employed is C/Pl. hence the isocost has a
constant slope.
#8. GO-GETTERS LTD.
Labour=#1
Capital=#2
Budget=#100
(PAGE 189, Q 2&3)
#2. Q 10 20 30 40 50 60
STC 1OOO 1200 (1350) 1450 (1600) 1850
TFC 500 500 (500) 500 (500) 500
TVC 500
SAC (100)
AFC (50)
SMC (100)
(700)
850
(950)
1100
(1350)
(60)
(45)
(36.3) (32)
(30.8)
(25)
(16.7)
(12.5)
(10)
(8.3)
(20)
(15)
(10)
(15)
(25)
#3.
RELATIONSHIP BETWEEN AFC, SAC AND AVC CURVES
Since SAC=AVC+AFC, the SAC curve will always lie above the AVC
curve. The difference between the two curves at any output level will be
equal to the value of the AFC for that level of output. Since the AFC is
high for lower levels of output, it follows that there will be a wider gap
between the SAC and AVC curves at lower levels of output. The lower
the output level, the wider will this gap be. Conversely, at higher level of
output, AFC tends to become very small so that the gap between the
SAC and AVC narrows down. At an infinitely large output level, when
the AFC approaches zero, the SAC and the AVC will tend to coincide.
RELATIONSHIP BETWEEN STC, TVC AND TFC CURVES
STC and TVC curves are both upward sloping and have the same slope
at all levels of output. This is not a coincidence since the difference
between the two curves at any output level is the TFC. Again, since the
TFC is constant, the difference between the STC and TVC curve will be
constant at every level of output. Finally the STC curve cuts the vertical
axis where the TFC intercepts the same axis.
MICRO-ECONOMICS THEORY TEXTBOOK
(Page 189, Q 1-3)
#1. Measuring of expansion path of a firm,
The point on an expansion path occur where the firm’s isocost curve, each
showing fixed total input cost, and its isoquants, each showing a particular level of
output, are tangent. The firm’s moves from one of these tangency points to the next;
the line joining the tangency points is called the expansion path. It is the expansion
path which is critical in determining the long-run costs of production of a firm.
The shape of the expansion path changes depending upon the type of returns to
scale prevalent.
#2.Comparison of diminishing marginal productivity and returns to
scale.
It’s important to keep in mind that marginal product and return to scale are not
the same concepts and need not go in the same direction. This is because marginal
product is calculated by adding one unit of either labor or capital and keeping the
other inputs the same, whereas returns to scale refer to what happens when all
inputs to production are scaled up. It is generally true that most production
processes start to exhibit decreasing marginal product of labor and capital pretty
quickly as quantity increases, but this doesn’t mean that the firm also exhibits
decreasing returns to scale. In fact, it’s quite common and perfectly reasonable to
observe deceasing marginal products and increasing returns to scale
simultaneously.
#3.
CONDITIONS FOR THE ATTAINMENT OF OPTIMUM
INPUT-MIX IN A MULTI-INPUT PRODUCTION FUNCTION
Economics output is not a function of input, because any given set of inputs can
be used to produce a range of outputs. When market prices of inputs are available,
the firm would seek to minimize the total input cost for a given level of output.
In the decision frame of a firm making economic choices regarding production,
the firm in perfect competition will choose to add input right up to the point where
the marginal cost of additional input matches the marginal product in additional
output.
PROBLEMS
#1. Demand and supply function
Qdx=25-5p
Qsx= -15+2.5p
Find equilibrium price and quantity
Qd=Qs
25-5p=-15+2.5p
25+15=2.5p+5p
40=7.5p
Divide both sides by 7.5
P=5.3
Quantity
Qdy=25-5p
=25-5(5.3)
=25-26.3
=-1.3
#2.
Qsy=-15+2.5p ,,,=-1.7
Equilibrium price and quantity of two complimentary goods X&Y whose
demand and supply function are;
Qdx=205-2.5Px-Py
Qsx=-30+1.5Px
Qdx=147.5-0.5Px-1.5Py
Qsx=-60+Py
 Qdx=Qsx
205-2.5Px-Py=-30+1.5Px
205+30-Py=1.5Px+2.5Px
25-Py=4Px
 147.5-0.5Px-1.5Py=-60+Py
147.5+60-0.5Px=Py+1.5Py
207.5-0.5Px=2.5Py
(Page 188, Ex 5,10,13,15).
#5. Q=4x+2x^2-1/3x^3
MPx=APx when APx is at its maximum
MPx=differentiate
=4x+2x*2-1/3x^3
=4+4x-x^2
APx=4x+2x^2-1/3x^3
X
=4+2x^2-1/3x^2
M
MPx=APx
4+4x-x^2=4+2x-1/3x^2
#13.
I will suggest that there shouldn’t be any change in the labour mix
used by the production department because a firm making economic choices
regarding production, the firm in perfect competition will choose to add input right
up to the point where the marginal cost of additional input matches the marginal
product in additional output.
(Page 225 problem 3, 5)
#3. Given the total cost function
Tc=6500+10q
(a) Equation for TFC & TVC.
TFC=6500
TVC=10Q
(b) equation for AFC, AVC, ATC & MC
AFC= TFC
Q
=6500/Q
AVC= TVC
Q =10Q/Q =10
ATC= TC
Q
=6500+10Q
Q
=6500+10
MC= ^TC
^Q
#5. Total cost function of a manufacturer.
TC=25+10Q-2.5q^2-1/3Q^3
(a) equation for TVC
TVC=TC-TFC
TVC=25+10Q-2.5Q^2-1/3Q^3-25
TVC=10Q-2.5Q^2-1/3q3
(b) AVC
AVC= TVC
Q
=10Q-2.5Q^2-1/3q^3
Q
=10-2.5Q-1/3Q^2
(c ) ATC
ATC=TC
Q
=25+10Q-2.5Q^2-1/3Q^3
Q
=25+10-2.5Q-1/3Q^2
=ATC=35-2.5Q-1/3Q^2
(D)
MC=^TC
^Q