NAME: Patnatson Anthony.T
COURSE: ECO 201
DEPARTMENT: Economics
MATRIC NUMBER: 13/SMS01/029
Question 1.
Microeconomic theory
Q.1a,b,c (p.188)
Q.2a (p.188)
Q.2b (p.188)
Q.3a and Q.5 (p.188)
Pg.225.Q3
p.226(q.5)
p.189 (q.5)
QUESTION 2
TEXTBOOK: AN INTRODUCTION TO MICROECONOMICS
1. Page 189: number 2 and 3
Number 2
SOLUTION
Short-run total cost
(STC) = short-run fixed cost (SFC) + short-run average cost (SAC)
Short-run average cost (TAC) =
Short-run marginal cost (SMC) =
Q
STC
TFC
TVC
SAC
AFC
SMC
10
1000
500
500
i.100
o.50
u. 100
20
500
f.700
j.60
p.25
v.20
30
c.500
850
k.45
q.16.67
w.15
40
500
g.950
l.36.25
r.12.5
x.10
50
d.500
1100
m.32
s.10
y.15
60
e.500
h.1350
n. 30.83
t.8.33
z. 25
WORK NOTE
STC= TFC+TVC
500+850
=1350
STC= TFC +TVC
500+ 1350
= 1850
TFC= is constant because variables used are in short run and can’t be changed. The
fixed, therefore;
factors used are
TFC= 500
TFC= is constant because variables used are in short run and can’t be changed. The
fixed, therefore;
factors used are
TFC= 500
TFC= is constant because variables used are in short run and can’t be changed. The
fixed, therefore;
TFC= 500
TVC= STC - TFC
1200- 500
factors used are
=700
TVC= STC- TFC
1450 – 500
= 950
TVC= STC – TFC
1850 – 500 =1350
SAC = STC/Q = 1000/10
=100
SAC = STC/Q = 1200/20
=60
SAC = STC/Q = 1350/30
=45
SAC = STC/Q =1450/40
= 36.25
SAC = STC/Q = 1600/50
=32
SAC = STC/Q = 1850/60
= 30.83
AFC = TFC/Q = 500/10
= 50
AFC = TFC/Q = 500/20
=25
AFC = TFC/Q = 500/30
=16.67
AFC = TFC/Q = 500/40
=12.5
AFC = TFC/Q = 500/50
=10
AFC = TFC/Q = 500/60
=8.33
SMC =-100
= /100/
SMC =-20 /20/7ujju
SMC
=-15 /15/
SMC =-10 /10/
SMC
= -15 /15/
SMC =-25 /25/
Number 3
Solution
The relationship between AFC, SAC and AVC
As long as Average Fixed Cost (AFC) and Average Variable Cost (AVC) fall, SAC will also fall Because
SAC= AFC+ AVC
When Average Variable Cost (AVC) fall but Average Fixed Cost (AFC)increases, changes in SAC depends
on the rate of change in average fixed cost and average variable cost
If decrease in AFC> increase in AVC, SAC falls
If decrease in AFC= increase in AVC, SAC is constant
If decrease in AFC< increase in AVC, SAC increases
The relationship between STC, TFC and TVC
The short-run total cost and output relationship refers to the change in STC caused by increasing output,
given the level of fixed inputs in production. The level of fixed inputs in economics is defined as capacity
or so called plant size. Fixed costs hence vary with the size of the plant but are constant for a given plant
size. The relationship can be expressed as;
STC = TVC + TFC
QUESTION 4
The law of diminishing returns is at best a short run phenomenon”. Discuss.
Solution
The law of diminishing returns can only work in the short run. Therefore, the law of diminishing return
states that if one input in the production of a commodity is increased while all others are held fixed, a
point will eventually be reached at which additions of input yield progressively smaller or diminishing
increases in output. It’s also known as THE LAW OF VARIABLE PROPORTION
“As equal increment of one input is added, the inputs of other productive services being held constant,
beyond a certain point, the resulting increments of produce will decrease i.e., additional product
(marginal product) will diminish”.“Increases in some inputs relative to other fixed input.