Principles of Microeconomics
ECO101
Revision Questions
Question One
Define and provide real world example for each of the following terms:
a. The scarcity principle:
b. No Free-Lunch Principle:
c. Marginal cost.
Suggested answer
You can provide the below definitions:
a. The Scarcity Principle: having more of any good thing necessarily requires
having less of something else
b. It is another expression of opportunity Cost of an activity (or a choice). Even if
you are not paying for lunch, somebody, somehow, always has to pay for it
even if you are not paying for lunch, somebody, somehow, always has to pay
for it The value of what must be foregone in order to undertake that activity
and we can say that it is the value of the next best alternative to the choice
taken. It considers explicit and implicit costs.
c. Marginal cost is the increase in total cost from one additional unit of an activity
Markers can give partial marks if the question is not fully answered, and they can use
their professional judgment in such situations.
Question Two
1
The table below contains information about different levels of production and the
total cost for each level. The marginal revenue (marginal benefit) of producing any
extra unit equals ($23). MB=MR=$23
Quantity
Total cost
0
1
2
3
4
5
0
24
40
54
66
100
Average cost=Total
cost/quantity
24/1=24
40/2=20
54/3=18
66/4=16.5
100/5=20
Marginal cost
24-0=24
40-24=16
54-40=14
66-54=12
100-66=34
Required:
a) Find the missing values in the table above.
b) Determine the levels of production that satisfy the cost-benefit test.
Quantity
0
1
2
3
4
5
Total cost
0
24
40
54
66
100
Average cost
Marginal cost
24
20
18
16.5
20
24
16
14
12
34
For the second part, You should indicate that according to the cost-benefit principle
the first four levels of production are satisfying the cost benefit test because in these
levels the marginal benefits ($23) outweigh the marginal cost.
Question Three
a) Explain what is meant by the demand function.
b) Draw the demand function showing its variables on the graph.
Price
Demand Curve
Quantity
2