Part 3
Economics 101 2023
Page 1
WORKSHEET
Multiple Choice Questions
1.
Utility, from consuming a good, is understood by economists to mean:
a)
b)
c)
d)
e)
how often we consume the good.
how much satisfaction or benefit we get from consuming the good.
how much it costs to buy the good.
how we best use the good.
none of the above.
The table below shows a hypothetical total utility schedule for a consumer of space
cakes. Use the table to answer questions 2 to 4.
Space Cakes consumed
0
1
2
3
4
5
6
7
2.
The consumer begins to experience diminishing marginal utility when she consumes
the:
a)
b)
c)
d)
e)
3.
first space cake.
second space cake.
third space cake.
fourth space cake.
seventh space cake.
Marginal utility becomes negative with the consumption of the:
a)
b)
c)
d)
e)
4.
Total Utility
0
9
19
27
35
42
42
40
fourth space cake.
fifth space cake.
sixth space cake.
seventh space cake.
third space cake.
Based on the table above, you can conclude that the:
a)
b)
c)
d)
e)
marginal utility of the fourth space cake is 6 utils.
marginal utility of the second space cake is 27 utils.
average utility of 3 space cakes is 9 utils.
average utility of 5 space cakes is 8 utils.
total utility of 7 space cakes is 102 utils.
Part 3
Economics 101 2023
Page 2
Answer questions 5 and 6 using the data below.
Quantity
0
1
2
3
4
5
5.
14 for dagga, 60 for redbull
14 for dagga, 45 for redbull
40 for dagga, 105 for redbull
8 for dagga, 30 for redbull
none of the above
The price of dagga is R2 per unit, the price of redbull is R5 per unit and income is
R19. What is the consumer equilibrium position, assuming that the entire income is
spent on dagga and redbull?
a)
b)
c)
d)
e)
7.
Total Utility
(Redbull)
0
60
105
140
170
180
The marginal utility for dagga and redbull at 2 units for each good is:
a)
b)
c)
d)
e)
6.
Total Utility
(Dagga)
0
26
40
48
50
50
1 unit of dagga and 2 units of redbull
2 units of dagga and 1 units of redbull
2 units of dagga and 2 units of redbull
2 units of dagga and 3 units of redbull
3 units of dagga and 2 units of redbull
A demand curve can be said to slope downwards because:
a)
b)
c)
d)
e)
supply slopes upwards.
consumers are constrained by income.
of the law of diminishing marginal utility.
prices move with demand.
total utility falls as price rises.
Part 3
Economics 101 2023
Page 3
Below is the demand and supply diagram for butter. Using the diagram, answer the
following three questions:
Price
20
10
0
8.
Quantity
What is consumer surplus when price equals 10 and quantity equals 20?
a)
b)
c)
d)
e)
9.
20
100
120
150
180
200
What is total willingness to pay when price equals 10 and quantity equals 20?
a)
b)
c)
d)
e)
100
200
250
300
400
10. Now assume we have a fall in supply. Assume this shift changes the equilibrium to
where price equals 14 and quantity equals 18. What is the new level of consumer
surplus?
a)
b)
c)
d)
e)
108
54
24
306
252
11. In economics, the short run is a period of time:
a)
b)
c)
d)
e)
of one year or less.
in which all inputs are variable.
in which all inputs are fixed.
in which the quantities of at least one input is fixed and the quantities of the
other inputs can be varied.
in which all inputs are variable but technology is fixed.
Part 3
Economics 101 2023
Page 4
12. Which of the following statements is correct?
a)
b)
c)
d)
e)
The short run is a time period of one year or less.
The short run is a period of time during which the quantities of all inputs can be
varied, but technology is held constant.
The short run is a period of time during which the quantity of at least one input
is fixed and the quantities of the other inputs can be varied.
The long run is a period of time during which the quantities of all factor inputs
are fixed.
The time period separating the short run from the long run is at least 3 months.
Answer questions 13 and 14 with reference to the following table, which shows the
short-run production function of a polo ball manufacturer
Number of machines
Number of workers
8
8
8
8
8
8
8
0
1
2
3
4
5
6
Output
(polo balls / day)
0
6
14
23
30
34
36
13. What is the average product of labour when two workers are employed?
a)
b)
c)
d)
e)
3 polo balls.
7 polo balls.
8 polo balls.
14 polo balls.
28 polo balls.
14. Diminishing marginal returns set in when the
production process.
a)
b)
c)
d)
e)
worker is added to the
2nd
3rd
4th
5th
6th
15. When the marginal product of labour is less than the average product of labour:
a)
b)
c)
d)
e)
the average product of labour is decreasing.
total product is increasing at an increasing rate.
the marginal product of labour is increasing.
the marginal product of labour curve is positively sloped.
the firm is experiencing increasing marginal returns.
Part 3
Economics 101 2023
Page 5
16. Suppose that a shoe manufacturer that employs 6 workers is able to increase the
average product of labour from 5 pairs of shoes per hour to 6 pairs of shoes per hour
by hiring a seventh worker. The seventh worker’s hourly marginal product is:
a)
b)
c)
d)
e)
1 pair of shoes.
7 pairs of shoes.
11 pairs of shoes.
12 pairs of shoes.
30 pairs of shoes.
17. The following table describes the daily production possibilities facing a small brewery.
Labour (L)
1
2
3
4
5
Average Product of Labour (APL)
(litres of juba)
3
6
8
9.5
10
The marginal product of the 3rd labourer is:
a)
b)
c)
d)
e)
2.67 litres of juba.
2 litres of juba.
8 litres of juba.
12 litres of juba.
24 litres of juba.
Part 3
Economics 101 2023
Page 6
18. Assume the following marginal product of labour curve:
MP
MP
Labour
The associated total product of labour curve would be:
(a)
(b)
TP
TP
TP
Labour
Labour
(c)
(d)
TP
TP
Labour
Labour
(e)
TP
Labour
Part 3
Economics 101 2023
Page 7
19. The vertical distance between the total cost and the total variable cost curves is:
a)
b)
c)
d)
e)
decreasing as output increases.
increasing as output increases.
equal to average fixed cost.
equal to total fixed cost.
equal to marginal cost.
20. The vertical distance between the average total cost curve and the average fixed
cost curve is:
a)
b)
c)
d)
e)
increasing as output increases.
decreasing as output increases.
equal to total variable cost per unit of labour.
equal to total variable cost.
negative.
21. The marginal cost curve intersects the:
a)
b)
c)
d)
e)
ATC, AVC and AFC curves at their minimum points.
ATC and AFC curves at their minimum points.
AVC and AFC curves at their minimum points.
ATC and AVC curves at their minimum points.
TC and TVC curves at their minimum points.
22. When the marginal cost curve is above the average total cost curve:
a)
b)
c)
d)
e)
the average fixed cost curve is rising.
the average fixed cost curve is horizontal.
the marginal cost curve is falling.
the marginal cost curve reaches a minimum.
the average total cost curve is rising.
23. Marginal cost is the amount that:
a)
b)
c)
d)
e)
total cost increases when one more labourer is hired.
fixed cost increases when one more labourer is hired.
variable cost increases when one more labourer is hired.
total cost increases when one more unit of output is produced.
fixed cost increases when one more unit of output is produced.
Part 3
Economics 101 2023
Page 8
The following table represents the short-run total cost schedule of a energy drink
manufacturer. Consider the table, then answer questions 24 and 25.
Labour
(workers per day)
0
1
2
3
4
5
Output
(energy drinks per
day)
0
3
8
12
14
15
Total Cost
(R)
40
70
100
130
160
190
24. When output increases from 3 to 8 energy drinks, the marginal cost of producing
one of those 5 energy drinks is:
a)
b)
c)
d)
e)
R5.00.
R6.00.
R12.50.
R20.00.
R30.00.
25. The average variable cost to the firm when 3 energy drinks are produced is:
a)
b)
c)
d)
e)
R10.00.
R13.33.
R23.33.
R30.00.
R70.00.
Use the table below to answer questions 26 to 28. The fixed cost to the firm is R500.
Cocaine (total product)
1
2
3
4
5
6
Total Variable Cost (TVC)
(Rands)
200
360
500
700
1 000
1 800
Part 3
Economics 101 2023
Page 9
26. The average variable cost to the firm when 4 units of cocaine are produced is:
a)
b)
c)
d)
e)
R175
R200
R300
R700
none of the above
27. The average total cost to the firm when 4 units of cocaine are being produced is:
a)
b)
c)
d)
e)
R175
R200
R300
R700
none of the above
28. The marginal cost of the 6th unit of cocaine is:
a)
b)
c)
d)
e)
R200
R300
R700
R800
none of the above
29. Average variable costs is a minimum at the same output at which:
a)
b)
c)
d)
e)
average total cost is a minimum.
marginal cost is a minimum.
average product is a maximum.
marginal product is a maximum
total product is a maximum
30. The average total cost of producing portable CD players in a factory is R300 at the
current output level of 100 per week. If total fixed cost is R20 000 per week:
a)
b)
c)
d)
e)
average variable cost is R 100.
average fixed cost is R400.
total cost is R10 000.
total variable cost is R30 000.
marginal cost is R300.
31. The reason why the long-run average cost curve can slope downwards as output
rises is because:
a)
b)
c)
d)
e)
of economies of scale.
the firm finds harder working labour on each successive short-run average cost
curve.
of diminishing returns to all inputs.
the firm is operating at its capacity (minimum efficient scale).
costs can rise as output rises.
Part 3
Economics 101 2023
Page 10
The diagram below shows short-run and long-run cost curves. Answer questions 32
and 33 using this information.
Cost
Output
32. Point A is best described as:
a)
b)
c)
d)
e)
a point where economies of scale are rising.
a point where diseconomies of scale are falling.
a point where the firm is operating at capacity (minimum efficient scale).
a point where diminishing returns has finished.
a point beyond which the firm cannot produce anymore output.
33. A movement from point A to B is associated with:
a)
b)
c)
d)
e)
increasing returns in the short-run.
decreasing returns in the short-run.
increasing returns to scale.
decreasing returns to scale.
constant returns to scale.
34. A firm is experiencing constant returns to scale when it increases all of its inputs by
20% and its output increases by:
a)
b)
c)
d)
e)
10%
15%
20%
25%
40%
Part 3
Economics 101 2023
Page 11
35. As a firm grows in size, diseconomies of scale may occur due to:
a)
b)
c)
d)
e)
management co-ordination problems.
diminishing returns to a fixed input.
ability to buy in bulk.
finding a faster production process.
none of the above.
Short Answer and Paragraph Questions
1.
Why is the concept of utility still useful to economists even if we cannot measure it?
2.
What is consumer surplus and how is it calculated? Use a simple diagram to illustrate
your answer.
3.
A new car in the dealer’s showroom had a sticker price of £35,900. Sally liked the car
but decided she would pay no more than £32,000 for it, otherwise she would do
without it. After haggling with the dealer, she purchased the car for £31,500. Did she
gain any consumer surplus? If so, how much? If not, why not?
4.
The following table represents the total utility for bread, butter and milk consumed by
John Rajoo. Derive John’s consumer equilibrium position for the three goods where
the price of butter is R5 per unit, the price of bread is R1 per unit and milk is R4 per
unit. John’s available income is R37.
1
2
3
4
5
6
7
Butter
21
41
59
74
85
91
91
Bread
7
13
18
22
25
27
28.2
Milk
23
40
52
60
65
68
70
5.
What type of adjustments can a firm make in the long run that it cannot make in the
short run? What adjustments can it make in the short run? How long is the short run?
6.
Using examples, describe the difference between fixed and variable inputs.
7.
State the law of diminishing returns. Exactly what is it that diminishes, and why does
it diminish?
Part 3
Economics 101 2023
Page 12
8.
What is the relationship between marginal product and marginal cost, and between
average product and average variable cost?
9.
Jake is a corn farmer. He rents his land on a long-term lease for £250,000 a year. He
pays his farm hands £28,000 a year. Is his rent a fixed cost or a variable cost? Are
the wages he pays his workers a fixed cost or a variable cost? Briefly explain your
answers.
10. What is the difference, if any, between diminishing returns and decreasing returns to
scale?
11. You are an employer seeking to fill a vacant position on an assembly line. Are you
more concerned with the average product of labour or the marginal product of labour
for the last person hired? If you observe that your average product of labour is just
beginning to decline, should you hire any more workers? What does this situation
imply about the marginal product of your last worker hired?
12. A student wrote: “When the average product of labour exceeds the marginal product
of labour, the marginal product of labour is increasing.” If you were the instructor, how
would you correct this statement?
13. “If the marginal product of labour curve slopes downward, then the average product
of labour curve necessarily must slope downward.” Explain whether the previous
statement is correct or incorrect?
14. Faced with constantly changing conditions, why would a firm ever have factors that
are fixed? What determines whether a factor is fixed or variable?
15. What is the relationship between the marginal product of labour and the marginal
cost?
16. What relationship exists between the long-run average cost curve and the short-run
average cost curves of different sized plants of any one firm?
17. Draw a long-run average cost curve of a firm which first experiences increasing
returns to scale followed by constant returns to scale.
18. Explain how a firm can experience increasing returns to scale, constant returns to
scale and decreasing returns to scale as output increases.
19. What are economies of scale? What is the main source of economies of scale?
20. What are diseconomies of scale and why might they occur?
Part 3
Economics 101 2023
Page 13
Questions for discussion in class
1.
Find the consumer equilibrium for the three goods tabled below. Available income
is:
a) R34 and
b) R94
In both cases, the price of pizzas is R2, the price of coke is R4 and the price of a bar of
chocolate is R10.
Quantity
0
1
2
3
4
5
6
7
8
9
10
2.
Pizzas
Ppizza = R2
Total Utility
0
72
136
192
240
280
312
336
352
360
360
Coke
Pcoke = R4
Total Utility
0
80
152
216
272
320
360
392
416
432
442
Chocolate
Pchocolate = R10
Total Utility
0
220
420
600
760
900
1020
1120
1200
1260
1300
Consider the following diagram:
Price
Pe
Qe
Quantity
Calculate consumer surplus when equilibrium is at a price of R10 and a quantity
traded of 10 units. Assume that the reservation price is R15. Suppose that a decrease
in supply increases equilibrium price to R12 and reduces the quantity traded to 8 units.
What effect will this have on consumer surplus?
Part 3
Economics 101 2023
Page 14
3. Short-run production and costs:
Labour
0
1
2
3
4
5
6
a)
b)
c)
d)
e)
TP or Q
0
50
130
230
320
400
465
MP
AP
-
TFC
TVC
TC
MC
ATC
-
Complete the above table (assume that TFC is R50 and the wage rate is R20
per worker).
Explain, using your own words, the law of diminishing marginal returns.
After how many workers are added to the production process do diminishing
marginal returns set in?
Explain, using the information in the above completed table, the relationship
between the marginal product of labour and the average product of labour.
What will happen to the total variable cost curve if wages are increased to R25
per worker per day?
Part 3
Economics 101 2023
Page 15
Multiple Choice Solutions
1.
b. Utility is defined as the benefit or satisfaction that is gained from consuming
something.
2.
c. (see table below)
3.
d. (see table below)
4.
c. (read off table below)
Space Cakes
consumed
0
1
2
3
4
5
6
7
total utility
marginal utility
0
9
19
27
35
42
42
40
9
10*
8
8
7
0
-2
* Note: it is possible for marginal utility to increase before starting to diminish in
accordance with the law of diminishing marginal utility.
5.
b. This is a simple case of subtracting the total utility at two units from the total utility
at one unit for each good. Thus for dagga this is 40 - 26 = 14; for redbull it is 105 - 60
= 45.
6.
d. Here we need to work out the consumer equilibrium position by finding the marginal
utilities for each good and then the marginal utility (MU/P) per Rand spent ratios. See
table below.
Quantity
0
1
2
3
4
5
TU
dagga
0
26
40
48
50
50
MU
dagga
0
26
14
8
2
0
MU/P
dagga
13
7
4
1
0
TU
redbull
0
60
105
140
170
180
MU
redbull
0
60
45
35
30
10
MU/P
redbull
12
9
7
6
2
Part 3
Economics 101 2023
Page 16
We are looking for the point where the marginal utility per Rand spent of redbull equals
the marginal utility per Rand spent of dagga. This occurs at 2 units of dagga and 3
units of redbull. We must check that this combination is affordable: (2 unitsdagga x R2)
+ (3 unitsredbull x R 5) = 19, so yes the combination is affordable.
7.
c. Demand maps out willingness to pay (i.e the price we wish to pay for each quantity)
against quantity. It is because we experience diminishing marginal utility as
consumption rises that our willingness to pay for the next unit falls as quantity
increases. Consumers are constrained by income, but it is not sufficient to explain the
downward sloping demand curve.
8.
a. Consumer surplus is the triangular area below the demand curve and above market
price. Hence we need to calculate the distance between the reservation price and the
market price (which is 20 - 10) and multiply this by quantity (20) and finally multiply
the answer by one half to end up with the area of the triangle: ½ x 10 x 20 = 100
9.
d. Total willingness to pay = consumer surplus + total price paid. Consumer surplus
is 100 (previous question); price paid for the equilibrium quantity is p x q = 10 x 20 =
200. Adding this to consumer surplus, we get an answer of 300.
10. b. If Supply falls, price rises and equilibrium quantity falls. The new equilibrium in the
question is said to be at P = 14 and Q = 18. In a very similar manner to the previous
question, we calculate consumer surplus as: ½ x 6 x 18 = 54.
11. d. by definition
12. c. by definition. Note that option (b) is the definition of the long run, and that option’s
(a) and (e) are incorrect because there is no fixed amount of time separating the short
run from the long run.
13. b. APL = TPL / L = output / number of workers = 14 / 2 = 7
14. c. Refer to the following table (note the addition of the column headed marginal
product)
Number of
machines
3
3
3
3
3
3
3
Number of
workers
0
1
2
3
4
5
6
Output
(polo balls / day)
0
6
14
23
30
34
36
Marginal product
6
8
9
7
4
2
Diminishing marginal returns set in when the marginal product of an additional
worker is less than the marginal product of the previous worker. Recall that marginal
product of labour is calculated as TPL / L.
Part 3
Economics 101 2023
Page 17
15. a. See figure 12.2 and 12.3 (Parkin, Ch 12 pp. 259&260 (Second Edition))
or figure 10.2 and 10.3 (Parkin, Ch 10 pp. 249&250 (first Edition)) for a graphical
representation of the relationship between total product, average product and
marginal product.
16. d. Consider the following table: (note the addition of the column headed total
product)
Labour
average product
6
7
5
6
total product
(= AP * L)
30
42
marginal product
12
17. d. Consider the following table: (note the addition of the column headed TPL)
Labour
1
2
3
4
5
Average Product of Labour
3
6
8
9.5
10
Total Product of Labour (TPL)
APL x L
3
12
24
38
50
Part 3
Economics 101 2022
Page 18
MPL = TPL / L = (24 - 12) / (3 - 2) = 12
18. a. Marginal product is the slope of the total product curve. Since marginal product is
constant, total product must be increasing at a constant rate.
19. d. TC = TFC + TVC i.e. the distance between the TC and TVC curves = TC - TVC =
TFC.
20. a. Since average fixed cost is always falling as output increases, and the average
total cost curve is a U-shaped curve, the distance between the two curves (=
average variable cost) is increasing as output increases (see figure 12.5, p. 262
second edition or figure 10-5, p. 252 first edition of Parkin).
21. d. The ATC and AVC curves are U-shaped curves (hence both reach minimum
points), but the AFC curve is an L-shaped curve and the TC and TVC curves are
reverse S-shaped curves.
22. e. From the usual average-marginal relationship, when the marginal cost curve is
above the average total cost curve, both the average total cost curve and the marginal
cost curve must be rising.
23. d. by definition (note that marginal cost is the amount by which total cost increases
when one more unit of output (not labour) is produced.)
24. b. MC = TC/Q = (100 - 70) / (8 - 3) = 30 / 5 = R6.
25. a. AVC = TVC / Q. When zero workers are employed, TVC = 0 and TC = R40 i.e. TFC
= TC - TVC = R40. Hence when 3 energy drinks are produced TVC = TC – TFC =
R70 - R40 = R30. AVC = R30 / 3 = R10.
Part 3
Economics 101 2022
Page 19
26. a. AVC = TVC / Q = 700 / 4 = 175.
27. c. ATC = TC / Q = (TVC + TFC) / Q = (700 + 500) / 4 = 300 or
ATC = AVC + AFC = 175 (from question 18) + 500 / 4 = 175 + 125 = 300
28. d. When the firm produces 5 units, TC = TVC + TFC = 1000 + 500 = 1500; when the
firm produces 6 units, TC = TVC + TFC = 1800 + 500 = 2300. Thus TC = 2300 1500 = 800, and Q = 6 - 5 = 1 i.e. MC =  TC /  Q = 800 / 1 = 800.
29. c. This is a very important section (please see p 210, Parkin).
30. a. AFC = R20 000/100 = R200; ATC = R300; AVC = ATC - AFC = R300 - R200 =
R100.
31. a. This question tests the understanding that the long run cost curve slopes
downwards due to economies of scale. Since bulk buying is the only example of
economies of scale in the answers, (a) is correct. Option (b) violates the assumption
that all labour is equally hardworking, (c) is a short-run only movement, (d) is where
economies of scale ends, (e) is nonsense since the question refers to falling costs.
32. c. Point A is at the MES or maximum capacity of the firm, since it is the minimum point
of the long-run cost curve, so (c) is correct. Economies of scale have finished or have
been fully realised at point A and diseconomies of scale have not yet begun, so
answer (a) and (b) are wrong. Diminishing returns is a short-run concept so (d) is
wrong; and the firm can produce more beyond A, but they choose not to due to
diseconomies of scale.
33. d. A movement from point A to B is associated with decreasing returns to scale, so
the answer is (d), since we are moving onto the upward sloping section of the longrun cost curve. Thus (e) and (c) must be wrong. Answers (a) and (b) are both shortrun movements and to get from A to B we need to increase the plant size which is a
long-run movement only.
34. c. A firm experiences constant returns to scale when the percentage increase in
output equals the percentage increase in inputs.
35. a. Answer (a) is correct since a lack of co-ordination is simply an example of poor
management and diseconomies of scale. (b) is a short-run reference, (c) is referring
to economies of scale. If we found a faster production process, that might affect the
whole long run cost curve (output might be higher at any cost level), and certainly not
lead to diseconomies of scale so (e) is clearly not correct.
Part 3
Economics 101 2022
Page 20
Solutions to Short Answer and Paragraph Questions
1.
Utility is a measure of satisfaction derived from consuming a good or service.
Individuals attempt to maximise utility from their income where different levels of utility
(measured in utils) are gleaned by different people from consuming a given good or
service. Even a good consumed at different times by the same person can yield
differing levels of utility (example: an umbrella in a rain storm yields very different
utility compared to a clear day).
As such, a particular good or service does not have a unique utility number attached
to it. It is therefore a purely subjective measure. The numbers that are attached to
utility are simply subjective comparisons across different goods, or within increasing
consumption of the same good. It is this comparison of relative utilities that are so
useful to economists. An individual who prefers god A over good B will attach a higher
utility value to good A. Thus we can compare satisfaction derived from the same good
between different people. A consumer can also demonstrate decreasing utility as she
or he consumes increasing quantities of the same good (i.e. the law of diminishing
marginal utility).
By attaching subjective utils to consumption in this way, economists can construct
theories as to how a consumer can maximise satisfaction in consumption from limited
income. The marginal utility derived from the last unit of income spent should be the
same for all goods consumed from an individual to maximise utility. Given that
consumers are rational, economists can explain why demand curves slope
downwards from left to right based on the principles of marginal and total utility.
2.
Consumer surplus is a measure of benefit from consumption. Consumer surplus is
calculated as the area above the price line, under the demand curve, or as total
willingness to pay minus the total amount paid. A simple diagram, such as the diagram
on page 182, Ch. 8, second edition or on page 167, Ch. 6, first edition of Parkin,
should suffice.
3 Yes. Consumer surplus is the difference between the highest price a consumer is willing
to pay (that is, the value of the good) minus the actual price paid. Sally gained a
consumer surplus of £500.00.
Part 3
Economics 101 2022
Page 21
4.
Units
1
2
3
4
5
6
7
TU
21
41
59
74
85
91
91
Butter
MU
21
20
18
15
11
6
0
MU/P
4.2
4
3.6
3
2.2
1.2
0
TU
7
13
18
22
25
27
28.2
Bread
MU
7
6
5
4
3
2
1.2
MU/P
7
6
5
4
3
2
1.2
TU
23
40
52
60
65
68
70
Milk
MU
23
17
12
8
5
3
2
MU/P
5.75
4.25
3
2
1.25
0.75
0.5
Equilibrium is at MU/P = 3
4 units of butter
5 units of bread
3 units of milk
expenditure = 4 x R5 = R20
expenditure = 5 x R1 = R5
expenditure = 3 x R4 = R12
Total spent
= R37
Total utility = 74 + 25 + 52 = 151 utils
5.
In the short run, a firm can change the quantities of variable inputs employed, but not
the quantities of fixed inputs employed. In the long run, a firm can vary the quantities
of all inputs employed. Economists define the short run as a period of time which is
so short that it is impossible to vary the quantity of at least one input employed. Thus
there is no fixed amount of time that separates the short run from the long run; rather
the period of time varies from industry to industry.
6.
A fixed input is defined as an input of which the quantity cannot be altered in the short
run (e.g. capital and land). A variable input is one of which the quantity can be
changed in the short run (e.g. labour).
7.
The law of diminishing returns states that as more of a variable input is combined with
one or more fixed inputs in a production process, points will eventually be reached
where first the marginal product, then the average product and finally the total product
start to decline. Think of reasons why marginal, average and total product eventually
diminish.
8.
Please refer to PPM p210: the relationship between production and cost. An important
relationship exists between marginal product and marginal cost:



over the output level over which marginal product is rising, marginal cost is
falling.
over the output level over which marginal product is falling, marginal cost is
rising.
at the output level at which marginal product is a maximum, marginal cost is a
Part 3
Economics 101 2022
Page 22
minimum.
An important relationship exists between average product and average variable
cost:
 over the output level over which average product is rising, average variable cost
is falling.
 over the output level over which average product is falling, average variable cost
is rising.
 at the output level at which average product is a maximum, average variable
cost is a minimum.
9.
Jake’s rent is a fixed cost. He is renting his land on a long-term lease and so the land
is a fixed input. The wages Jake pays are a variable cost. Labour is a variable input
so the wages are a variable cost.
10. The law of diminishing returns states that as a firm uses additional units of a variable
input, while holding constant the quantity of fixed inputs, the marginal product of the
variable input will eventually diminish. Decreasing returns to scale occur when a firm
increases all of its inputs by an equal percentage, and this results in a lower
percentage increase in output. Diminishing (marginal) returns is a short- run concept
since there must be a fixed input. Decreasing returns to scale is a long- run concept
since all inputs must be variable.
11. In filling a vacant position, you should be concerned with the marginal product of the
last worker hired because the last worker hired will influence total product. The point
at which the average product begins to decline is the point where average product is
equal to marginal product. Although adding more workers results in a further decline
in average product, total product continues to increase. Only when total product falls
do we necessarily stop hiring. When average product declines, the marginal product
of the last worker hired is lower than the average product of previously hired workers.
12. There are several errors. The corrected sentence is “When the average marginal
product of labour exceeds the marginal average product of labour, the marginal
average product of labour is increasing.”
13. The statement is incorrect. The relationship between the marginal product of labour
and the average product of labour is that when the marginal product of labour exceeds
the average product of labour, the average product of labour curve slopes upward and
when the marginal product of labour is less than the average product of labour, the
average product of labour curve slopes downward. So, even if the marginal product
of labour curve slopes downward, as long as it is above the average product of labour
curve, the average product of labour curve slopes upward.
Part 3
Economics 101 2022
Page 23
14. Whether a factor is fixed or variable depends on the time horizon in consideration: all
factors are fixed in the very short run; all factors are variable in the long run. Therefore,
the firm must, by definition, have one or more factors fixed in the short run.
Remember, all fixed inputs in the short run represent outcomes of previous long-run
decisions based on firms’ estimates of what they could profitably produce and sell.
15. Initially, as each additional unit of labour is employed, the marginal product of labour
increases. The cost of each worker is the same--the wage rate. Because each
worker’s cost is the same, but each additional worker produces more output than the
previous worker, the cost of producing an additional unit of output decreases. The
cost of producing an additional unit of output is the marginal cost. Therefore when the
marginal product of labour is increasing, the marginal cost is decreasing. At some
point, the marginal product of labour will reach a peak, at which level of output
marginal cost is minimized. After that point, the law of diminishing returns means that
the marginal product decreases. When the marginal product decreases, the marginal
cost increases; each worker costs the same to hire, but an additional worker produces
less output than the previous worker. Therefore when the marginal product of labour
is decreasing, the marginal cost of additional output is increasing.
16.
Average
cost
SRAC1
SRAC2
SRAC3
SRAC2
LAC
Q1 Q2
Output
Q3 Q4
Q1 is produced at point A on SRAC1. Q2 can be produced by moving to point E
(achieved by adding more variable inputs to a given level of fixed input). However, by
adding to the previously fixed inputs, say by introducing another plant, we move onto
a new short-run average cost curve, SRAC2, which is lower than SRAC1 due to
increasing returns to scale. Thus it is cheaper to produce Q2 by expanding plant size,
which gives us our LRAC shape. This logic is repeated until point C is reached.
Increasing output beyond point C gives us decreasing returns to scale. Reducing
output from Q4 (at point D) to Q3 can only be achieved at minimum cost by
Part 3
Economics 101 2022
Page 24
reducing the size of the plant (to point G. Q3 could be produced by staying on SATC4
from employing less labour in a larger plant, but this would be achieved at higher cost
(point F).
17.
Average
cost
LAC
Increasing
returns
Constant returns
Output/period
18. Most firms experience at first increasing, then constant, and lastly decreasing
returns to scale. At low levels of output, proportional increases in all inputs may
lead to larger-than-proportional increases in output due to increased opportunities
for specialised factors of production. As the firm grows, it may duplicate its level of
operation such that output increases at the same rate as the increased use of all
inputs. At some scale, the firm experiences an inability to increase output at the
same rate as increases in input, a situation that can arise from management
diseconomies.
19. Economies of scale are when a firm increases all its inputs by the same percentage
and its output increases by a larger percentage so that its average total cost
decreases. Economies of scale result because of specialization. When a firm
increases its capital stock, the capital can be more specialized and hence produce
more output than less specialized, more generalized capital. Similarly, when a firm
increases its labour force, it can hire more specialists, each of whom is better at
doing his or her assigned task than a less specialized individual. As a result of
specialization, the firm’s average product increases so that its average total cost
decreases.
20. Diseconomies of scale mean that as the firm increases all its inputs by the same
percentage, its output increases by a smaller percentage. As a result, the firms’
long-run average cost rises. Diseconomies of scale can arise from the sheer size
of a firm. As a firm grows larger, it becomes increasingly more difficult to manage.
Communicating information up and down the management hierarchy as well as
communicating between managers and workers on the same level becomes more
costly. As a result, the firm experiences diseconomies of scale, that is, its long-run
average cost increases as it expands the scale of its operation by producing yet
more output.
Part 3
Economics 101 2022
Solutions to odd-numbered questions
from Chapters in Part 3
CHAPTER 5:
Solutions to Problems
1a. Equilibrium price is €1.00 a floppy disc and
the equilibrium quantity is 3 floppy discs a month.
1b. Consumers paid €3.
The amount paid equals quantity bought
multiplied by the price paid. That is, the amount
paid equals 3 floppy discs multiplied by €1.00 a
disc.
1c. The consumer surplus is €2.25.
The consumer surplus is the area of the triangle
under the demand curve above the market price.
The market price is €1.00 a disc. The area of the
triangle equals (2.50 – 1.00)/2 multiplied by 3,
which is €2.25.
1d. Producer surplus is €0.75.
The producer surplus is the area of the triangle
above the supply curve below the price. The price
is €1.00 a disc. The area of the triangle equals
(1.00 – 0.50)/2 multiplied by 3, which is
€0.75.
1e. The cost of producing the discs sold is €2.25.
The cost of producing the discs is the amount
received minus the producer surplus. The amount
received is €1.00 a disc for 3 discs, which is
€3.00.
Producer surplus is €0.75, so the cost of producing
the discs sold is €2.25.
1f. The efficient quantity is 3 floppy discs a
month. The efficient quantity is the quantity that
makes the marginal benefit from the last disc
equal to the marginal cost of producing the last
disc. The demand curve shows the marginal
benefit and the supply curve shows the marginal
cost. Only if 3 floppy discs are produced is the
quantity produced efficient.
3a. The maximum price that consumers will pay
is £3. The demand schedule shows the maximum
price that consumers will pay for each sandwich.
The maximum price that consumers will pay for
the 250th sandwich is £3.
3b. The minimum price that producers will accept
is £5.
The supply schedule shows the minimum price
that producers will accept for each sandwich. The
minimum price that produces will accept for the
250th sandwich is £5.
3c. 250 sandwiches exceed the efficient quantity.
The efficient quantity is such that marginal
benefit from the last sandwich equals the
Page 30
marginal cost of producing it. The efficient
quantity is the equilibrium quantity—200
sandwiches an hour.
3d. Consumer surplus is £400.
The equilibrium price is £4. The consumer surplus
is the area of the triangle under the demand curve
above the price. The area of the triangle is (8– 4)/2
multiplied by 200, which is
£400.
3e. Producer surplus is £400.
The producer surplus is the area of the triangle
above the supply curve below the price. The price
is £4. The area of the triangle is (4 – 0)/2
multiplied by 200, which is £400.
3f. The deadweight loss is £50.
Deadweight loss is the sum of the consumer
surplus and producer surplus that is lost because
the quantity produced is not the efficient quantity.
The deadweight loss equals the quantity (250 –
200) multiplied by (5 – 3)/2, which is £50.
5a. Ben’s consumer surplus is £122.50. Beth’s
consumer surplus is £22.50 and Bill’s consumer
surplus is £4.50.
Consumer surplus is the area under the demand
curve and above the price. At 40 pence, Ben will
travel 350 miles, Beth will travel 150 miles and
Bill will travel 30 miles. To find Ben’s consumer
surplus extend his demand schedule until you
find the price at which the quantity demanded by
Ben is zero—the price at which Ben’s demand
curve cuts the y-axis. This price is 110 pence. So
Ben’s consumer surplus equals (110 – 40)/2
multiplied by 350, which equals £122.50.
Similarly, Beth’s consumer surplus equals (70 –
40)/2 multiplied by 150, which equals £22.50.
And Bill’s consumer surplus equals (70 – 40)/2
multiplied by 30, which equals £4.50.
5b. Ben’s consumer surplus is the largest because
he places a higher value on each unit of the good
than the other two do.
5c. Ben’s consumer surplus falls by £32.50.
Beth’s consumer surplus falls by £12.50 and
Bill’s consumer surplus falls by £2.50.
At 50 pence a mile, Ben travels 300 miles and his
consumer surplus is £90. Ben’s consumer surplus
equals (110 – 50)/2 multiplied by 300, which
equals £90. Ben’s consumer surplus decreases
from £122.50 to £90, a decrease of
£32.50. Beth travels 100 miles and her consumer
surplus is £10, a decrease of £12.50. Bill travels
20 miles and his consumer surplus is £2.00, a
decrease of £2.50.
Part 3
Economics 101 2022
Solutions to Additional Problems
1a. The maximum price that consumers will pay
is £2.50.
The demand schedule shows the maximum price
that consumers will pay for each bottle of spring
water. The maximum price that consumers will
pay for the 30th bottle is £2.50.
1b. The minimum price that producers will accept
is £1.50.
The supply schedule shows the minimum price
that producers will accept for each bottle of spring
water. The minimum price that produces will
accept for the 30th bottle is £1.50.
1c. 30 bottles is less than the efficient quantity.
The efficient quantity is such that marginal
benefit from the last bottle equals the marginal
cost of producing it. The efficient quantity is the
equilibrium quantity—40 bottles a day.
1d. Consumer surplus is £40.
The equilibrium price is £2. The consumer surplus
is the area of the triangle under the demand curve
above the price. The area of the triangle is (4 –
2)/2 multiplied by 40, which is
£40.
1e. Producer surplus is £40.
The producer surplus is the area of the triangle
above the supply curve below the price. The price
is £2. The area of the triangle is (2 – 0)/2
multiplied by 40, which is £40.
1f. The deadweight loss is £5.
Deadweight loss is the sum of the consumer
surplus and producer surplus that is lost because
the quantity produced is not the efficient quantity.
The deadweight loss equals the quantity (40 – 30)
multiplied by (2.50 – 1.50)/2, which is £5.
CHAPTER 10:
Solutions to Problems
1a. To draw the total product curve measure
labour on the x-axis and output on the y-axis. The
total product curve is upward sloping.
1b. The average product of labour is equal to total
product divided by the quantity of labour
employed. For example, when 3 workers are
employed, they produce 6 dinghies a week, so the
average product is 2 dinghies per worker. The
average product curve is upward sloping when the
number of workers is between 1 and 8, but it
becomes downward sloping when 9 and 10
workers are employed.
1c. The marginal product of labour is equal to the
increase in total product when an additional
worker is employed. For example, when 3
Page 31
workers are employed, total product is 6 dinghies
a week. When a fourth worker is employed, total
product increases to 10 dinghies a week. The
marginal product of going from 3 to 4 workers is
4 boats. The marginal product curve is upward
sloping when up to 5.5 workers a week are
employed and downward sloping when more than
5.5 workers a week are employed.
1d. (i) When Rubber Dinghies produces fewer
than 30 dinghies a week, it employs fewer than 8
workers a week. With fewer than 8 workers a
week, marginal product exceeds average product
and average product is increasing. Up to an output
of 30 dinghies a week, each additional worker
adds more to output than the average. Average
product increases.
(ii) When Rubber Dinghies produces more than
30 dinghies a week, it employs more than 8
workers a week. With more than 8 workers a
week, average product exceeds marginal product
and average product is decreasing. For outputs
greater than 30 dinghies a week, each additional
worker adds less to output than average. Average
product decreases.
3a. Total cost is the sum of the costs of all the
inputs that Rubber Dinghies uses in production.
Total variable cost is the total cost of the variable
inputs. Total fixed cost is the total cost of the fixed
inputs. For example, the total variable cost of
producing 10 dinghies a week is the total cost of
the workers employed, which is 4 workers at
€400 a week, which equals €1600. Total fixed
cost is €1000, so the total cost of producing 10
dinghies a week is €2600.
To draw the short-run total cost curves, plot
output on the x-axis and the total cost on the yaxis. The total fixed cost curve is a horizontal line
at €1000. The total variable cost curve and the
total cost curve have shapes similar to those in
Fig. 10.4, but the vertical distance between the
total variable cost curve and the total cost curve is
€1000.
3b. Average fixed cost is total fixed cost per unit
of output. Average variable cost is total variable
cost per unit of output. Average total cost is the
total cost per unit of output.
For example, when the firm makes 10 dinghies a
week: Total fixed cost is €1000, so average fixed
cost is €100 per boat; total variable cost is
€1600, so average variable cost is €160 per boat;
and total cost is €2600, so average total cost is
€260 per boat.
Marginal cost is the increase in total cost divided
by the increase in output. For example, when
output increases from 3 to 6 dinghies a week, total
cost increases from €1800 to €2200, an
Part 3
Economics 101 2022
increase of €400. That is, the increase in output of
3 dinghies increases total cost by €400. Marginal
cost is equal to €400 divided by 3 boats, which is
€133.33 a boat.
The short-run average and marginal cost curves
are similar to those in Fig. 10.5.
5. The increase in total fixed cost increases total
cost but does not change total variable cost.
Average fixed cost is total fixed cost per unit of
output. The average fixed cost curve shifts
upward. Average total cost is total cost per unit of
output. The average total cost curve shifts
upward. Marginal cost and average variable cost
do not change.
7a. Total cost is the cost of all the inputs. For
example, when 3 workers are employed they now
produce 12 dinghies a week. With 3 workers, the
total variable cost is €1200 a week and the total
fixed cost is €2000 a week. The total cost is €3200
a week. The average total cost of producing 12
dinghies is €266.67.
7b. The long-run average cost curve is made up
the lowest parts of the firm’s short-run average
total cost curves when the firm operates 1 plant
and 2 plants. The long-run average cost curve is
similar to Fig. 10.8.
7c. It is efficient to operate the number of plants
that has the lower average total cost of a boat. It is
efficient to operate one plant when output is less
than 27 dinghies a week and it is efficient to
operate two plants when the output is more than
27 dinghies a week.
Over the output range 1 to 27 dinghies a week,
average total cost is less with one plant than with
two, but if output exceeds 27 dinghies a week,
average total cost is less with two plants than with
one.
9. The decrease in total fixed cost decreases total
cost but does not change total variable cost.
Average fixed cost is total fixed cost per unit of
output. The average fixed cost curve shifts
downward. Average total cost is total cost per unit
of output. The average total cost curve shifts
downward. Marginal cost and average variable
cost do not change.
Page 32
11a. For example, the ATC of producing a balloon
ride when Bonnie rents 2 balloons and employs 4
workers equals the total cost (€1000 rent for the
balloons plus €1000 for the workers) divided by
the 20 balloon rides produced. The ATC equals
€2000/20, which is €100 a ride. The ATC curve is
U-shaped, as in Fig. 10.5.
11b. The long-run average cost curve is similar to
that in Fig. 10.8.
11c. Bonnie’s minimum efficient scale is 13
balloon rides when Bonnie rents 1 balloon.
The minimum efficient scale is the smallest
output at which the long-run average cost is at a
minimum. To find the minimum efficient scale,
plot the ATC curve for each plant and then check
which plant has the lowest minimum average total
cost.
11d. Bonnie will choose the plant (number of
balloons to rent) that gives her minimum average
total cost for the normal or average number of
balloon rides that people buy.
Solutions to Additional Problems
1a. For example, the average total cost of
producing a pizza when Mario rents 2 ovens and
employs 4 workers equals the total cost (€200 rent
for the ovens plus €300 for the workers) divided
by the 17 pizzas produced. The average total cost
equals €500/17, which is €29.41 a pizza.
The average total cost curve is U-shaped, as in
Fig. 10.5.
1b. The long-run average cost curve is similar to
that in Fig. 10.8.
1c. Mario experiences economies of scale at
output levels of 4 to 15 pizzas a day.
When economies of scale are present, the LRAC
curve slopes downward. Mario’s LRAC curve
slopes downward between the output levels of 4
to 15 pizzas a day.
1d. Mario will choose the plant (number of ovens
to rent) that gives him minimum average total cost
for the normal or average number of pizzas that
people buy.