Hand -in-Assignment (Week 7)

Done by: Wang Tongfan Z3441050

Q1 a
Ans: c
Q1 b
Ans:d
Q2 a
Ans: The productivity if variable factor initially increases but
eventually falls as the first unit of labour can specialise, but the
productivity eventually falls as there is overcrowding of labour
leading to redundancy of additional labour. As each additional
labour is less productive, a given quantity of output needs more
variable inputs. Therefore marginal costs increase.
Average total cost is the summation of average fixed cost and
average variable cost. As a factor is fixed, production is in short run.
The average total cost curve initially decreases as fixed costs would
be spread over a larger amount of output produced.The average
total cost curve would then increase as marginal costs increase due
to the law of diminishing returns.
Q2 b
Ans:

In the diagram, given the market price of the good (P0) that is
determined by market forces of demand and supply, the quantity
supplied (Q0) is determined entirely by the marginal cost
curve.Intuitively, given the price of a good, the quantity supplied is
determined by the marginal cost and the marginal revenue.
However, in the case of a perfectly competitive firm, the quantity
supplied is determined entirely by the marginal cost curve.
Furthermore, at a price lower than its average variable cost the firm
will shut down production to avoid making a loss greater than its
total fixed cost. Therefore the supply curve of a perfectly competitive
firm is the portion of the marginal cost curve above the average cost
curve.

Ans: The supply curve is represented by the marginal cost curve

only when the firm is a perfectly competitive price taker. The
marginal cost curve is a supply curve only because a perfectly
competitive firm equates price with marginal cost. This happens
only because price is equal to marginal revenue for a perfectly
competitive firm. Should price and marginal revenue not be equal,
then a profit maximising firm does not equate price to marginal cost.
As such, the marginal cost curve is not the firm's supply curve.

Because perfect competition does not exist in the real world, most
real world firms do not have equality between price and marginal
revenue, and thus do not equate price to marginal cost. In fact, real

world firms with varying degrees of market power do not have

supply curves comparable to that of an idealistic perfectly
competitive firm.
Q3 a
Ans: It is a measure of how much the quantity demanded or
quantity supplied will change if price changes. It captures how price
sensitive consumers or suppliers are for a given good or service by
measuring the responsiveness of quantity demanded or quantity
supplied of that good or service to changes in that good s or
services price.

Q3b
Ans: Elasticity of demand at any point on the demand curve is the
pricequantity ratio at that point (P/Q) times the reciprocal of the
slope of the demand curve (1/slope). The slope, and hence its
reciprocal, is constant along a straight-line demand curve, but the
pricequantity ratio and hence price elasticity of demand
declines as we move down the curve.

Q4
Ans:

Qd= 150-3p
when Qd = 0
150-3p=0
p=50
when p=0
Qd = 150
At equilibrium pt
Qd=Qs
150-3p=5p-10
8p=160
p=20
Qd=90, Qs=90
PED= (1/slope)x(P/Q)
= (1/((50-0)/(0-150)))x(20/90)
= -0.67(to 2d.p)
Absolute PED = 0.67

Q5
Ans:
Qd= 150-15p
Qs=5p-30
At equilibrium pt
Qd=Qs
150-15p=5p-30
20p=180

p=9
Qd=15
Qs=15
Therefore equilibrium price of market is $9/ton and equilibrium
quantity of market is 15 tons.