EXERCISE QUESTION 1 The following schedule shows the diminishing marginal returns of labor.

Labor Land (units) 3 3 3 3 3 3 3 3 3 3 Capital(units) Total Product 0 5 20 32 42 50 55 56 56 54 Average Product Marginal Product

0 1 2 3 4 5 6 7 8 9

7 7 7 7 7 7 7 7 7 7

(a) (b) (c)

Calculate and complete the AP and MP columns in above schedule. Draw a diagram (not according to scale) for the above situations, indicating the curves and stages of production. For a rational producer, which stage will he choose? Why?

QUESTION 2 (a) (b) (c) (d) In one diagram, sketch TP, MP and AP curves. On the same diagram show the three stages of production. Which stage is the most efficient? Why? Explain the changes in TP when MP is: (i) increasing (ii) decreasing

QUESTION 3 The following question is related to production in short run. Qty of labor (unit) Total product (TP) 100 200 200 280 1050 190 1190 Marginal Product (MP) Average Product (AP) Price of output (RM) 2 2 2 2 2 2 2 2 2 Marginal Revenue Product (RM)

1 2 3 4 5 6 7 8 9 (a) (b) (c) (d)

Complete in the TP, MP, and AP columns. The table above is related to a concept in production theory. Name the concept. Fill in the column for marginal revenue product. If wage is constant at RM100.00 per worker, how many workers will the producer hire?

QUESTION 4 The number of repairs done by a computer repair shop depends on the number workers employed. The relation ship between them is shown as in table below: Number of workers 1 2 3 4 5 6 7 8 9 (a) (b) Total number of repairs (TP) Average number repairs (AP) 8.00 10.00 11.66 11.25 10.40 9.50 8.50 7.56 5.56 Find the TP and MP by completing the table. Sketch the TP, AP and MP curves. Label the point when MP = 0 in your graph. Marginal number of repairs (MP)

(c)

Over what range of labor inputs the followings are observed: (i) (ii) (iii) increasing returns to scale diminishing returns to scale negative returns to scale

QUESTION 5 Based on the data below, answer the following questions. Output (unit) 0 1 2 3 4 5 6 (a) (b) (c) (d) (e) Total Cost (TC) 24 33 41 48 54 61 69 Complete the above table. Calculate the fixed cost for the firm Is the firm operating in short run or long run? Why? Calculate the average fixed cost of producing 3 units of output. If the marginal revenue is constant at RM6.00, determine the profit maximizing output for this firm. Average Cost (AC) Marginal Cost (MC)

QUESTION 6 Assuming that a single firm is a purely competitive industry has variable cost as indicated in the following table. TP 0 1 2 3 4 5 6 7 8 TVC 0 10 15 20 30 50 80 120 170 TC AFC AVC AC MC

Complete the table.

QUESTION 7 Given below is a cost schedule of an electrical firm operating in Klang Valley. Qty of output 0 1 2 3 4 5 6 7 TC 20 35 45 50 55 65 85 110 TFC TVC AVC ATC MC

(a) (b) (c)

Complete the table above. Is the firm operating in short run or long run? Justify a reason for your answer. Based on the above schedule, roughly sketch the MC curve.

QUESTION 8 Company `Helang Timur a perfectly competitive firm, has cost structures as shown below. Its TFC is RM90.00 Q 0 1 2 3 4 5 6 7 (a) (b) TC TVC AVC AC MC 30 26 21 29 42 58 71 Compute the table. (i) Calculate its profit/loss at the equilibrium output, if the firms Marginal Revenue is RM42.00 (iii) Based on (i), will the company continue its operation? Why? AFC

QUESTION 9 Assume a single firm is perfect competitive industry has a variable cost as below: TP (units) 0 1 2 3 4 5 6 7 (a) (b) (c) (d) TVC 0 55 75 90 110 135 170 220 TC (Cost) 40 AFC AVC AC MC

Complete the table above. Is the firm operating in the short run or long run? Give a reason for your answer. If the price of product is RM55.00, what will be the equilibrium output of the firm? Show what will its profit OR losses be? If the product falls to RM25.00, what is the new equilibrium output? Calculate the profit OR losses now.

QUESTION 10 Average cost

10

12

14

16

18

Output (in `000)

(i)

In the long run, what plan size should the firm build if it wants to produce at: A. 6,000 units B. 14,000 units At what range of output level does the following occur? A. Economies of scale B. Diseconomies of scale

(ii)

QUESTION 11 Based on the diagram below, answer the following questions. Price, cost, revenue MC AC AVC T S Q W E U

R P

Output

(a) In which market structure is the firm operating? Why is it so? (b) State the equilibrium price and quantity/output. (c) What type profit is earned by this firm? How much? (d) What is the total fixed cost and total variable cost at quantity OB? (e) Draw a similar diagram in your answer booklet to show the shut down point of this firm.

QUESTION 12 Below are the cost curves of a firm.

Price

MC P4 A P3
AVC

AC

MC= Marginal Cost AC =Average Cost AVC = Average Variable Cost

P2 B P1

Output

(a) At which price will normal profits be earned? (b) At which price will abnormal profits be earned? (c) What is the minimum price at which the firms will produce before deciding to close down? (d) What is represented by the vertical distance AB.? (e) Define marginal cost.

QUESTION 13 Based on the diagram below, answer the following questions: Cost/revenue MC 16 14 12 10 8 AR = MR AR = MR AR = MR AR = MR AR = MR

Output

(a) In which market structure is operating? Give your reasons. (b) If the price is RM16.00, calculate the profit or loss at equilibrium. (AC= RM10.00) (c) If the price is RM14.00, calculate the equilibrium output (x)(the TC = RM60.00 and the economic profit is RM45.00) (d) If the price is RM18.00, it is necessary for the firm to shut down? Why? (AFC = RM4.00 and TC = RM50.00)

QUESTION 14 The following graph shows the long run equilibrium for XX-Ray Co: Price, cost and revenue (RM)

A B 100

35

D 0 Q1 Q2

C Output

(a) Label curves A, B, C and D. (b) What is the equilibrium output and what is the optimum level of output? (c) In which market structure is the firm operating? (d) What profit is earned by the firm and explain why the firm is earning such profit? QUESTION 13 The following diagram shows the equilibrium position of a firm. Price/cost MR 18 15 12

MC AC

10

10

14 16

Output

(a) Based on the above diagram, determine the (i) Profit- maximizing output (ii) Price level (iii) Total revenue (b) In which market structure is the firm operating? Give your reasons. (c) Calculate the amount of profit that the firm makes at equilibrium.

QUESTION 14 (i)

(ii)

12 10 8 2

(iii) (iv)

(vi) 0 5 10 20

(v) (vii)

(a) Label the curves (i-vii) in the graph above. (b) At the equilibrium output, how much is the: (i) Profit earned by the firm (ii) Total fixed costs? (iii) Total variable costs? (c) If the firm produces 20 units of output, what type of profit will the firm earn? Should the firm cease production? (d) Under normal condition, what is the shut down price?

QUESTION 15 The diagrams below show the market for air travel by Malaysian Airlines to a particular destination. Assume that the marginal cost (MC) for each passenger is RM100.00 for both market A and B. Price/cost Price/cost

250 200

200 MC 250 100 MR1 0 20 30 50 AR1 0 25 40 MR2 60 MC AR2

100

MARKET A

MARKET B

(a) List down two necessary conditions for price discrimination to be successful. (b) The equilibrium output for Market A is ____________________ units and ________________________ units for Market B. (c) Given that MC is equal to AC, calculate the firms total profit from both markets? (d) State two reasons why the above firm practices price discrimination?

QUESTION 16 Based on the diagram below, answer the following questions.

Cost/revenue

10 9

MC AC

AR 0 5 7 8 MR (a) Calculate the firms total revenue (TR) at the profit maximizing level of output. (b) Calculate the firms total cost (TC) and the total profit in equilibrium. (c) If the firm sets the price at RM10, will its total revenue increase? (d) State two assumptions in deriving the kinked demand curve. 10 Output

QUESTION 17 The diagram below refers to an oligopolistic firm:

Price/cost (RM)

MC2 MC1

5 4 3 2 D 0 35 MR

Output

(a) To maximize profit, what is the price the firm will charge for its product?, what is its new (b) Suppose the production cost of the firm increases from MC1 to MC2, what is its new equilibrium level of output and price? (c) Is there any change in price and output? Why? (d) Explain briefly why the demand curve is kinked? (e) This oligopolistic model is also known as the _____________________model.

QUESTION 18 Price/cost (RM)

9 8 7 6 5 4 3 2 1 0 10 20 30 40 50 60 70 MR 80 90 100 D

110

120 Output

(a) Copy the diagram on the graph paper. On the same set of axes plot the following cost schedules. Q 20 30 40 SMC (RM) 3 4 5 SAC (RM) 4.50 4.00 4.50 SMC1 (RM) 4 5 6 SAC2 (RM) 5.50 5.00 5.50

(b) If the oligopolies cost schedules are given by SMC and SAC, find how much profit this firm makes. (c) If the oligopolies cost schedules change to SMC1 and SAC1, find the new best level output, the price at which this outputs is sold and the new level of profits for these oligopolies.

QUESTION 19 Answer the following questions based on the diagram below:

Price of good X

40

MC

30 AC 25 15 10 AR

200

250

300

350

Output of good X

MR

(a) The diagram portrays _____________________________(model) (b) The equilibrium output of good X is ____________________________ units and the equilibrium price of good X is RM ____________________________. (c) State two important characteristics of the market structure illustrated in the diagram above. (d) Calculate the amount of profit the firm is making at this equilibrium output.