Arab Open University
Final Take Home Exam (FTHE)
Duration: 48 Hours
Academic Year: 2020-2021
Semester: Spring
Branch: Kuwait
Program: Business
Course title: Microeconomics
Course Code: ECO101
Student Name:
Student ID:
Section Number:
Tutor Name:
Mark Details
Allocated Points
Questions
1
2
3
4
Total
Weight
25
25
25
25
100
Points
Points deduction
Presentation (5 points)
Plagiarism
Total
Total Mark
Notes on plagiarism:
A. According to the Arab Open University By-laws, “the following acts represent
cases of cheating and
Plagiarism: 
Verbatim copying of printed material and submitting them as a full answer
of the exam.

Verbatim copying of material from the Internet, including tables and
graphics.

Copying other students’ notes or reports.

Using paid or unpaid material prepared for the student by individuals or
firms.
B. Penalties for plagiarism ranges from failure in the exam to expulsion from the
university.
Declaration: I hereby declare that the submitted FTHE is my own work and I
have not copied any other person’s work or plagiarized in any other form as
specified above.
Student Signature
Tutor’s Feedback
Tutor Name:
Tutor Signature:
Answer the following FOUR questions:
(Your answer is expected to be provided after each question)
Question One (25 points)
a) Explain the effect of the increase of fish meat prices on the
equilibrium price and quantity of the chicken meat.
(6 points)
When the price fish meat in the market increases, the demand for fish
meat will decrease. People will instead look for a substitute to satisfy
their demand. Chicken as a close substitute for fish meat will be highly
demanded by the consumers in the market. The increased demand of
chicken meat will lead to the increase in the market equilibrium price
in order to carter for the high demand but low production.
b) What will happen to equilibrium price and quantity of clothes if the
wage paid to cloth workers increases?
(6 points)
In the labour market, the increase in salary leads to a decline in labour
requirement and vise versa. While according to the quantity supplied,
the increase wage rate leads to a higher quantity supplied too. The
increase in the wages for the cloth workers will lead to an increase in
the quantity of cloths being produced. This will result in surplus
production in the market. The flooding in the market will lead to a low
price so as to meet the production rate.
c) Explain the impact of the change in consumer's income on the
demand of goods and services.
(6points)
The consumer income determines the constrain with which they
have to consume in order to maximize their utility. when the
income increases, the demand for goods and services are likely to
change. For the normal goods and services, increase in income will
lead to an increase in their demand. The inferior goods’ demand
decline with the increase in consumer income. The consumer is
also likely to demand more of the luxury goods with the increase in
demand.
d) Explain the difference between movement along the demand curve
and shifting in the demand curve.
(7 points)
Movement along the demand curve is occurs when there is a
change in the quantity demanded and the price of the commodity.
While, at constant price variation, other forces that influence
quantity demanded which shifts the curve upwards or downwards
leads to the shift in demand curve. Movement along the demand
curve occurs on the line while shift demand curve changes the
position of the initial demand relationship.
Movement along demand curve only occurs when demand quantity
is related to price. Whereas, shift in demand curve occurs due to
changes in consumer income, tastes and preferences, future
expectations, prices of close substitutes, population, etc. the
movement along the curve shows changes in quantity demanded
while shift shows the change in the demand for the commodity.
The movement along demand curve can be to the right or to the left
showing expansions or contraction while the shift in demand curve
can either be rightward or leftward showing increase or decrease in
demand.
Question Two (25 points)
Based on the following table, answer the questions below:
Output TC
TFC TVC ATC AFC
AVC MC TR
MR
400
0
$200 200
0
0
-
-
-
1
$260 200
60
260
200
60
$60 400
400
2
$320 200
$120 60
100
60
60
400
3
$420 200
220
140
66.66 73.33 100 1200 400
4
$640 200
440
$160 50
160
220 1600 400
5
$800 200
600
160
$120
160 2000 400
40
-
800
a) Complete the table below based on the relationships among the
various cost functions
(18 points)
TC = (AVC +AFC) x Q, =FC + VC
TFC = TC – TVC
TVC = AVC x Q
𝐴𝑇𝐶 =
𝑇𝐶
𝑄
𝐴𝐹𝐶 =
𝑇𝐹𝐶
𝑄
𝐴𝑉𝐶 =
𝑇𝑉𝐶
𝑄
𝑀𝐶 =
∆𝑇𝐶
∆𝑄
b) If the marginal revenue equals $400, what is the level of
production that maximize the profits of producer? Explain your
answer.
(7 points)
Total Revenue = Price x Quantity
∆𝑇𝑅
∆𝑄
Marginal Revenue =
To maximize profit, MR = MC
450
400
350
Price
300
250
200
150
100
50
0
0
1
2
3
4
5
6
Quantity
MC
MR
The quantity shall be above 5. This is because the MR and MC curves
do not intersect. The average cost at quantity 5 has also began to fall
showing that there is still economy of scale in production.
Question Three (25 points)
a) Based on the information provided in the table below:
i.
Describe the impact of the cost behavior on economies of scale,
constant returns to scale, and diseconomies of scale in each
firm? Calculate the average cost for each firm to justify your
answer.
(9 points)
In firm 1, the average total cost is decreasing with the increase on
the quantity of production. This follows the concept of the
economies of scale where the average cost is expected to decline
with the expansion in production. Therefore, while the quantity
produced rises, the cost of production per unit declines.
In firm 2, the average cost rises with the rise in production
quantity. The situation whereby the average cost rises with the
increase in production quantity is referred to as diseconomies of
scale. When a firm expands to be so large that its management is
inefficient, there results unreasonably high costs. This high cost of
production becomes unsustainable to the firms in the long run.
In firm 3, at the beginning of production expansion up to quantity
3, the average total cost remains the same. This is referred to as
constant returns to scale whereby allowing all production inputs to
expand does not increase the average production cost. However,
the firm experiences diseconomies to scale for any production that
is above quantity 3 since it exceeds the company’s optimal
operation cost. An increase in the quantity of input, leads to
increase in average cost.
ii.
what is the value of fixed cost in each firm?
(6 points)
Fixed cost refers to the amount that a firm has to incur on a regular
basis regardless of the quantity of production or revenue. It is a
cost incurred when there is no production taking place; for this case
it is at quantity 0 for all the firms. The fixed cost carter for value of
fixed assets and machineries that must be in place before any
production takes place. The capital-intensive venture have large
fixed costs and economies to scale when the cost is equally
distributed to all products.
The total value of fixed cost per firm are as follows:
Firm 1, the fixed cost=$2400
Firm 2, the fixed cost = $6000
Firm 3, the fixed cost = $40
Output
TC firm 1 ATC
TC Firm 2 ATC
firm 1
TC
ATC
Firm 2
Firm 3
firm 3
0
$2400
-
$6000
-
$40
-
1
$3000
3000
$14000
14000
$100
100
2
$5600
2800
$30000
15000
$200
100
3
$7800
2600
$48000
16000
$300
100
4
$9600
2400
$72000
18000
$1000
250
5
$11000
2200
$100000
20000
$2000
400
6
$12000
2000
$144000
24000
$4800
800
b) "When the total cost of production decrease, we can say that the
firm faces positive return to scale". Discuss this statement.
(10 points)
The concept of economies to scale implies that the firm can be flexible
to produce at a larger scaler at least cost. If the production quantity
raise demands less input to achieve, it means that the output will
remain high but the resources used in production are kept low hence
lowering the per unit cost of production compared to that in the smallscale production. The aim of the firms is to maximize profits through
production at the optimal levels which results from cost minimization.
Positive returns to scale are the case whereby, the firm raises its
productivity per unit of input while the quantity of output is rising. For
a firm to face positive returns to scale, it is a result of the increasing
output quantity but with a considerable decline in the cost of labor.
Question Four (25 points)
a) What should a firm do if it realizes that its marginal revenue is more
than its marginal cost?
(8 points)
In the short run or long run, the aim of the firm is to maximize it profits
by setting prices and output quantity that will result in bigger margins.
The firms produce up to where the marginal cost equals marginal
revenue. This is because, the profits are maximized at this point when
the firm increases output level until the marginal benefit equals zero. If
the firm produces at the point where the marginal revenue is greater
than the marginal cost, it means that the firm is underutilizing its
resources. Therefore, it should produce more and more quantity of
output that it does at the present time. The firm can increase profit by
increasing output.
b) What should a firm do if it realizes that its average cost is more than
its average revenue in the short run?
(8 points)
For the firm to maximize profits, the average revenue must be above
the average cost. When the average cost and average revenue are the
same, it means that the firm s breaking even and not making any profits.
When the average revenue over the average cost, it means that the
output is able to pay the output costs and even get profit from
production. In any instance that the company realizes that the average
cost is above the average revenue, they may need to increase the output
price in the short run so as to cover for the losses.
c) Explain the difference between economic profits and accounting
profits. Support your answer with example.
(9 points)
Accounting profit is attained by getting the difference between the
total monetary revenue and the total monetary cost which is computed
through the principles of accounting. It is the bookkeeping costs that is
reflected on the firm’s balance sheet for a particular financial year
containing debits and credits. It takes into account the explicit costs of
the firm that it incurs to maintain production and uses monetary
revenue as the firm’s compensation after product sale. It only
considers the firms profits and loss account for a specified period. It
looks at the company’s net income.
Economic profit is attained by computing the difference between the
total monetary value and total cost where the total cost includes both
implicit and explicit costs. Economic profit takes into account the
opportunity costs which are related to the production and is therefore
lower compared to the accounting profit. It also accounts for longer
production period as compared to accounting profit. It is used to
determine entry and exit to the market. It looks at the company’s cash
flow.
Best wishes