MICRO ECONOMICS TUTORIAL ONE:
INTRODUCTION TO ECONOMIC CONCEPTS OF SCARCITY CHOICE AND
OPPORTUNITY COST
Question ONE
1.
Consider the PPC of an economy below.
Producer goods
C
B
A
Y
0
a)
b)
c)
d)
i.
ii.
Consumer goods
What is(are) the basic Economic principle(s) does this PPC illustrates?
When is it possible for this institution to produce at i) point C ii)at point Y
If the economy is interested in long term growth, which growth path will it pursue?
Compare points A and B in terms of
Current standard of living
Future standard of living
Sketch a PPC to show an increase in the inputs used in producing the consumer goods
Question TWO
2. Suppose an economy is faced with the production possibility schedule.
Combination
A
B
C
D
E
Capital goods (K)
Consumer goods (C)
0
1
2
3
4
50
45
25
10
0
a)
Calculate the opportunity cost of the first unit of capital produced in this
economy
b)
What will be the consequence of choosing a combination 2K+25C instead of
3K +10C.
c)
How might the economy be able to produce
i.
4K + 30C.?
ii.
2k + 20C?
Question THREE
3.
Consider the table below relating to the production combination of two (2)
goods produced by a country.
Combination
Output of goods
Output of goods
A
B
0
0
40
150
80
250
100
300
1
2
3
4
a)
Draw a production possibility curve using the information from the table
above
b)
State Four assumptions on which the curve is based
c)
What is the opportunity of increasing the output of goods A from 40 units to
80 units?
d) Consider goods A to be a Consumer good and goods B a capital good. Between
combination 2 and 3, which of the combination represent full employment and high
standard of living in :
i)
The short run
ii)
The long run
e) Briefly account for when:
i)
When it is possible to increase both goods at the same time.
ii)
When it is impossible to increase both goods at the same time.
iii)
Briefly Account for the shape in ‘a’ above
Question FOUR
4. Consider the table below relating to the production combination of two (2) goods
produced by a country.
Combination
1
2
3
4
5
6
7
8
Labour
Goods A
Labour
Goods B
00
00
8
100
20
200
18
200
50
300
30
300
70
400
40
400
85
500
48
500
95
600
52
600
100
700
54
700
102
00
0
100
a) Establish the production possibility and draw a production possibility curve using
the information from the table above.
b) i. State Four assumptions on which the curve is based
ii What principle does the curve in (a) illustrate ?
c) Under what circumstance will this country experience the following conditions
i.
The shape of the curve in (a) above
ii.
Producing combination of 40A + 85 B
iii.
Producing combination of 30A + 85 B
iv.
Producing combination of 20A + 50 B
d) Consider goods A to be a Consumer good and goods B a capital good. Between
combination 2 and 3, which of the combination represent full employment and high
standard of living in :
iii)
iv)
e) Briefly
iv)
v)
The short run
The long run
account for when :
When it is possible to increase both goods at the same time.
When it is impossible to increase both goods at the same time.
Question FIVE
5. In a village community which consist of 5 workers each of whom can either produce a bag
of yam (good A) or an artisanal hoe (good B). Regardless of how many other workers are
engaged in the same occupation, a worker can produce three (3) bags of yams and five (5)
hoes a year.
a. Draw a production possibility for bag of yams and unit of hoes in the community
b. If there is a new method of cultivating yams increase the output per worker to 6
bags of yams a year, draw the new production passivity frontier
c. What accounts for the shape of the production frontier in (a) and (b) above?
d. Apart from new method of cultivating yams, what other method can be used to
cause a change in the PPC from that of (a) to that of (b)?
e. i. State Four assumptions on which the curve of (a) is based
ii What principle does the curve in (a) illustrate ?
f. Under what circumstance will this village experience the following conditions
i.
Producing combination of 6A + 15 B
ii.
Producing combination of 12A + 10 B
iii.
Producing combination of 6A + 10 B
f) Consider goods A to be a Consumer good and goods B a capital good. Between
combination 2 and 3 of the production possibility schedule, which of the
combination represent full employment and high standard of living in :
v)
The short run
vi)
The long run
g) Briefly account for when:
vi)
When it is possible to increase both goods at the same time.
vii)
When it is impossible to increase both goods at the same time.
MICRO ECONOMICS TUTORIAL TWO:
ECONOMIC SYSTEMS AND PRODCTION
ECONOMIC SYSTEMS
Question ONE
1.
“In a pure market economy, the state has no role in deciding the basic production and
consumption decision but in a mixed and command economy, the state does.”
a) List four features of a pure market economy and three features of a mixed
economy
b) What is the meaning of consumers sovereignty
c) Briefly explain three (2) reasons why the government intervenes in a market
economy?
d) Briefly explain three (3) role of price mechanism in resource allocation
e) Explain TWO reasons why countries move from planned to mixed economy
Question TWO
2. “Citizens need merit and public goods for their wellbeing. Despite the presence of these
goods, other goods like free and economic goods exist…”
a) Define and give examples of public and merit goods
b) Briefly explain three reasons why
i)
Merit goods are to be supplied only by the price mechanism
ii)
Merit goods are to be supplied only by the state
c)
Distinguish between free good and economic goods.
d) Distinguish between Direct and Indirect production
e) Distinguish between short period production and long period production.
f) Explain four Benefits in specializing in the production of a particular economic good
PRODUCTION
MULTIPLE CHOICE QUESTIONS FOR CHAPTER 3-PRODUCTION
A. (i) and (ii) only
B. (ii) and (iii) only
1. Economies of scale cause average
C. (iii) and (iv) only
cost to decline in the short run.
D. (iv) only
A. True
B. False
4. When a firm produces one extra
unit of output, what is the
2. Which one of the following is not a
marginal cost of the unit?
source of economies of scale?
I.
The increase in total cost
A. The introduction of specialist
of production
capital equipment
II.
The increase in the variable
cost of production
B. Bulk buying
III.
The increase in the average
C. The employment of specialist
cost
of production
managers
A. Definition 1 only
D. Cost savings resulting from new
B. Definition 2 only
production techniques
C. Definition 3 only
D. Definitions 1 and 2 only
3. Which of the following always rise
when a manufacturing business
5. The law of diminishing returns
increases its output?
can apply to a business only when:
(i)
Fixed costs
A. All factors of production can be
(ii)
Marginal cost
varied.
(iii)
Average variable cost
(iv)
Total costs
B.
C.
D.
6.
A.
B.
C.
D.
7.
A.
B.
C.
D.
8.
At least one factor of production is
fixed.
All factors of production are fixed.
Capital used in production is
fixed.
Harold Ippoli employs 30 men in
his factory which manufactures
sweets and puddings. He pays
them FCFA5 per hour and they all
work maximum hours. To employ
one more man he would have to
raise the wage rate to FCFA5.50
per man hour. If all other costs
remain constant, the marginal cost
per hour of labour is now:
FCFA20.50
FCFA15.00
FCFA5.50
FCFA0.50
A firm operating in a perfectly
competitive market will continue
production in the short run when
I.
Price exceeds average total
cost at the point when
marginal revenue equals
marginal cost
II.
Price equals average total
cost at the point where
marginal revenue equals
marginal cost
III.
Price is less than average
total cost but exceeds
average variable cost at the
point where marginal
revenue equals marginal
cost and the price is
expected to cover average
total cost in the future
IV.
Price is less than average
total cost and average
variable cost at the point
where marginal revenue
equals marginal cost
although price is expected
to cover average total cost
in the future
I only
II and III
I, II and III
All of the above
Diseconomies of scale occur in a
business when:
A.
B.
C.
D.
Minimum efficient scale is reached
Short-run variable costs begin to
rise
Diminishing returns to a limited
factor of production begin to occur
Long-run average costs begin to
rise
Which of the following
propositions are false?
I.
It is possible for the average
total cost curve to be falling
while the average variable cost
curve is rising.
II.
It is possible for the average
total cost curve to be rising
while the average variable cost
curve is falling.
III.
Marginal fixed costs per unit
will fall as output increases.
IV.
Marginal costs will be equal to
marginal variable costs.
A. Propositions 1 and 3 are false.
B. Propositions 1 and 4 are false.
C. Propositions 2 and 3 are false.
D. Propositions 2 and 4 are false.
9.
10.
A.
B.
C.
D.
11.
Which of the following items could
be the cause of diseconomies of
scale?
I.
A firm has to lower its
prices in order to sell a
higher volume of output,
and so producing more
becomes unprofitable.
II.
Expansion of the industry
as a whole forces up the
cost of production
resources for firms in the
industry.
III.
Employees feel a growing
sense of alienation and loss
of motivation as their firm
gets bigger.
Items 1 and 2 only
Items 2 and 3 only
Items 1 and 3 only
Item 3 only
Which of the following statements
about the short run marginal cost
curve is false?
A.
B.
C.
D.
12.
I.
II.
III.
A.
B.
C.
D.
13.
I.
II.
III.
A.
Marginal cost equals average cost
when average cost is at a
minimum
Marginal cost depends in part
upon fixed costs
When average cost is falling,
marginal cost will be below average
cost
Marginal cost will be rising under
conditions of diminishing returns
Which of the following are true?
The long run average cost
curve shows the minimum
average cost of producing at
each output level when the
firm can choose among all
possible plant sizes
Minimum efficient scale is the
point at which long run
average costs cease to fall
The long run average cost
curve rises beyond a particular
level of output because of
diseconomies of scale
I and II
II and III
I and III
I, II and III
Locke and Boult Co is a firm of
security guards which provides
night watchmen to guard the
premises of client firms. One such
firm is Chinese Walls Co, which
employs a guard from Locke and
Boult for its head office building.
The cost of the guard is a
variable cost to Locke and
Boult, since the number of
guards the firm employs
depends on the demand for
their services.
The cost of the guards is a
fixed cost to Chinese Walls plc
since the employment of the
guard is not related to the
volume of output of the firm.
The cost of the guard is a
social cost, since the guard
protects the premises of
Chinese Walls from burglary
and fire.
Statements 1 and 2 only are
correct
B.
C.
D.
14.
Statements 2 and 3 only are
correct
Statements 1 and 3 only are
correct
Statements 1, 2 and 3 are correct
Muscles Co can only sell more of
its product at progressively lower
prices. Assuming that there is
diminishing marginal physical
productivity of labour, what
implications does this have for the
marginal revenue product curve
(MRP curve) for the firm's labour?
A. The MRP curve will be
completely inelastic.
B. The MRP curve will equal the
average revenue product curve.
C. The MRP curve will fall faster
than if Muscles Co was a
perfectly competitive firm.
D. The MRP curve will no longer
be an indicator of wage levels.
15. Decreasing returns to scale only
apply:
In the short run
In the long run
If there is one fixed factor of
production
D. If companies have monopoly
power
16. The Hoppaboard Bus Company
has just replaced its original fleet
of four buses, each of which had a
crew of two, with four new oneman buses. The new buses have
the same capacity as the old
buses. As a consequence, the
company has been able to reduce
the labour cost per passenger-mile
and run the same service as
before. This is because the
company has obtained the benefits
of:
A. Economies of scale
B. The division of labour
C. Higher labour productivity
D. Lower maintenance costs
A.
B.
C.
17. In the short run
A. Market participants cannot adjust
fully to a change in market
conditions
B.
C.
D.
Producers can alter production
levels by expanding the size of
their production facilities
The supply of many goods is
relatively elastic
Both demand and supply are fully
flexible
A.
B.
C.
D.
Horizontal integration
Vertical integration
Conglomerate diversification
Organic growth
20.
Chocco makes chocolate bars, and
has been successful in recent
years. It is looking to grow,
through a strategy of horizontal
integration. Which is the most
suitable company for Chocco to
merge with to achieve this aim?
A.
Cocoaplant Co, which grows the
cocoa used in making the
chocolate
Technical efficiency
B.
Bitesize Co, a rival manufacturer
of chocolate bars
19. A merger between two firms at
C.
Dairyway Co, the milk company
which supplies the milk for its
chocolate
D.
All Hours Co, a newsagent which
sells Choco’s products
18.
When a firm is producing at the
lowest point on its average cost
curve it is achieving
A.
B.
C.
D.
Allocative efficiency
Normal profit
Equilibrium efficiency
different stages in the same
production process – for example,
between an oil extraction company
and an oil shipping company – is
an example of:
PROBLEM SOLVING QUESTIONS FOR CHAPTER 3-PRODUCTION
Question ONE
a) What do you understand by the law diminishing return
b) How does it guides the firm in taking production decisions
c) Distinguish between diminishing returns and diseconomies of scale
Give a detail explanation of how long run average cost curve may be affected by return to
scale
Question TWO
2. The table below shows the changes in average product per day as additional workers
are employed in an industry
No of workers per day
1
2
3
4
5
6
7
8
Average product (Kg’s) per day
100
125
140
145
140
130
117
102
87
9
a)
b)
c)
d)
e)
At what level of employment is marginal product highest
With what number of employment is production most efficient
What level of employment does total production start to fall?
Distinguish between increasing return to variable factor and economies of scale
Sate the law of diminishing returns to variable proportion
Question THREE
3. An enterprise notice the value of sales of bags of sugar and number of workers
employed from one of its shops.
No of workers
1
2
3
4
5
6
7
Total sales (bags)
75
210
300
360
390
390
350
a) Determine the average returns
b) After what level of employment does the extra return of employing an extra worker
starts to fall.
c) At what level of employment does the enterprise attain maximum efficiency?
d) At what level of employment does the enterprise attain increasing and decreasing
returns to variable factors?
Question FOUR
4. The data below shows the variation in output resulting from variations in inputs.
Total inputs (units) %change in input
Total output (units %change in output
)
400
200
400
600
800
1000
1000
1600
2134
2660
a. Complete the table above
b. State the law of i)diminishing returns ii) returns to scale
c. Identify the range of output within which there is
i)
Increasing returns
ii)
Decreasing returns
iii)
Constant returns
d. Sketch a diagram to show the various returns to variable factors using :
i.
Average product and marginal product
ii.
Total product and marginal product curve