PAF – Karachi Institute of Economics and Technology NN Campus

Course: Micro & Macro Economics Total Marks: 4

Faculty: Muhammad Amin Hasan
Class ID: 101140
Examination: Assignment 2 (Spring-19)

Q.1 Star Electronics, a manufacturer of LED bulb, has the following short-run production function of
its product (3 watt LED bulb). It uses 40 units of capital and variable input (labor) to produce
bulbs. Suppose the market price of a bulb is Rs.100/unit and wage paid to one labor is Rs.2500
per day.

Average Total Marginal

Marginal Total Marginal
Product Revenue Revenue
Capital Labour Output Product Labor Labor
of Product Product
of Labor Cost Cost
Labor of Labor of Labor

40 0 0 0 0 0 0 0 0
40 1 100 100 100 10000 10000 2500 2500
40 2 250 150 125 25000 15000 5000 2500
40 3 450 200 150 45000 20000 7500 2500
40 4 600 150 150 60000 15000 10000 2500
40 5 700 100 140 70000 10000 12500 2500
40 6 750 50 125 75000 5000 15000 2500
40 7 780 30 111 78000 3000 17500 2500
40 8 800 20 100 80000 2000 20000 2500
40 9 790 -10 88 79000 -1000 22500 2500

a. Complete the table using your economic understanding of short-run production function.
b. Determine the point at which diminishing returns occurs.
Ans: When 6th labour came in production marginal revenue drop down from 10k to 5k
c. Indicate the points that define the three stages of production.
Ans: i) Increasing Returns up to labour 3,
ii) Decreasing Returns when 5th labour work in this production,
iii) Negative Returns when 9th labour appointed for production.

d. Plot the marginal and average product of labor on a graph and indicate three stages of

Page 1 of 4
 Production.

e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
e.
What is the profit maximizing level of employment?
Ans: Profit maximization level up to labour 7, when profit marginal revenue is Rs. 3000, from
8th labour marginal return is Rs. 2000, so this amount is less than the labour wage amount.

Page 2 of 4
Q.2 Suppose the table given below shows the short-run production function of a leather shoes
manufacturer in Karachi. Suppose the price of capital (fixed input) is $100 per unit and price of
labor (only variable input) is $40 and Q indicates the pair of shoes produced.

K L Q TFC TVC TC AFC AVC AC MC

5 0 0 500 0 500 500.0 0.0 500.0 500.0
5 1 16 500 40 540 31.3 2.5 33.8 40.0
5 2 37 500 80 580 13.5 2.2 15.7 40.0
5 3 64 500 120 620 7.8 1.9 9.7 40.0
5 4 93 500 160 660 5.4 1.7 7.1 40.0
5 5 123 500 200 700 4.1 1.6 5.7 40.0
5 6 152 500 240 740 3.3 1.6 4.9 40.0
5 7 177 500 280 780 2.8 1.6 4.4 40.0
5 8 199 500 320 820 2.5 1.6 4.1 40.0
5 9 214 500 360 860 2.3 1.7 4.0 40.0
5 10 219 500 400 900 2.3 1.8 4.1 40.0

a. Calculate TC, AFC,AVC, AC and MC using your understanding from lecture.

b. Is it linear, quadratic or cubic relationship between output and cost of production?
c. Plot AC, AVC and MC on a graph.

Q.3 Answer the following questions:

a. What are the different types of market structures?
b. What is perfect competition? Briefly explain its characteristics.
c. Give example of an industry that approximates this market structure?
d. How does a demand curve of a perfectly competitive firm look like?
e. Discuss the short run and long run economic profit c situation in this market structure.

Q.4 Answer the following questions:

a. What is a monopoly? Briefly explain its characteristics?
a. Give example of an industry that approximates this market structure?
b. How does a demand curve of a monopoly look like?
c. How does a monopoly decide its profit maximizing level of output?
d. Can a monopolist earn economic profit in the long run? Why?

Q.5 Pak Furniture, a manufacturer of wooden furniture, estimates the following relations
between its cost and monthly output:

TC = 400,000 + 100Q + 0.25Q2

Page 3 of 4
 a- Derive the marginal cost equation and calculate the marginal cost of production at
6,500 and 8,000 units of unit.

b- Assume Pak Furniture operates as a price taker in a competitive market. What is this
firm’s profit-maximizing level of output if the market price of its wooden chair set is
Rs.1000?

c- Suppose, Pak Furniture operates as a monopolist in a market and faces market

demand as P=1600-2Q. What is the firm’s profit-maximizing level of output?

Q.6 Imagine a perfectly competitive firm faces the situation in the short-run illustrated by the
graph given below. Copy this graph on your answer booklet and answer the following
questions given below:

a- Indicate the profit maximizing level of output for this firm?

b- Does this firm earn economic profit or incur economic loss? Explain.
c- Should the firm leave the market or keep producing in the short-run? Why?
d- What do you expect will happen in the long-run? Explain

Page 4 of 4