ECON1101 HAND IN 2

1.a) C
b) B
2. a) This may be attributed to the law of diminishing marginal returns. This law
states that after a point, per unit of increased input will yield marginally reduced
units of output. Hence, at the lowest point of the MC curve, all factors of production
are being used optimally and to their maximum efficiency. However, as producers
continue to increase units of input, inefficiencies arise as each extra unit is less
productive. This may be illustrated through the example of machinery workers in a
factory. After a certain point of hiring labour, employees get in each other's way
whilst operating machinery thus creating inefficiencies, reducing total productivity
and thus increase per unit costs of production, reflected by the rising MC curve.
Average total cost (ATC) is the sum of fixed costs (which includes capital) and
variable costs (which includes labour). As fixed costs remain constant, they do not
affect the changing gradient of the ATC curve. It is affected, however, by the
changing variable costs of labour. As the firm increases units of labour, their per unit
cost of production decreases due to the increased production capacity. Hence their
marginal cost per unit of production decreases, shown by the decreasing MC curve.
This also causes a decrease in the ATC curve. However, due to the law of
diminishing marginal returns, after a point each extra unit of input (in this case,
units of extra labour) yield marginally lower units of output. Thus as extra units of
labour are hired, the marginal cost of production begins to increase, reflected in the
rising of the MC curve. This is also translated to rising total costs and thus an
increasing ATC curve.
b) The short run denotes a period of time during which at least one factor of
production is fixed. Typically this refers to payments made for capital. Thus
regardless as to whether the firm produces or not, they must continue to make the
payments for their capital. As a result, in the short term, variable costs, typically
labour, are considered when deciding whether or not to produce. Even if profits are
less than average total cost, which is variable costs plus fixed costs, the firm's
profits would be higher, or 'less negative' than profits from shutting down
production which would yield a more economically negative result (due to continued
fixed payments). Is it important to note that this 'improved negative profit' is only
the case if the marginal benefit is above the minimum point of the AVC. This is
further explained below.
At points below the minimum AVC, the supply curve is NOT represented by the
marginal cost curve. This is because as this point, the losses from fixed cost
payments would still yield better results than continued production. If they were to
continue production, the firm would incur the variable costs of labour IN ADDITION
to fixed costs, all while their marginal benefit (the price paid by consumers) is below
the firms cost of labour, ie. their variable cost. Thus profit (shutdown) > profit
(production) hence the firm is better off not producing and there is no supply of
goods below the minimum AVC.

3. a) Elasticity refers to the percentage change in the quantity of goods demanded

resulting from a small percentage change in price. Essentially, elasticity captures
how consumer demand responds to changes in the prices for goods and services.
b) Elasticity at a point may be given by PA/QA * 1/slope Assuming the gradient of the
curve remains constant, the 1/slope becomes a constant. As you move from left to
right, the price declines whilst the quantity demanded rises. This is due to the law of
demand. As the numerator decreases and the denominator increases, P A/QA
reduces. As the product of the above formula decreases, elasticity decreases. Thus
it may be seen that elasticity of demand declines as you move from left to right
along the demand curve.
4. At equilibrium, Q=90, P=20, m=1/3
Elasticity = 2/3
5. P= $9, Q= 15 tons