TUTORIAL 4

PLEASE SUBMIT ON MONDAY, 10AM

Question 1

Please identify correct shape of cost curves.

 Question 2

Find remaining values.

Question 3

It is known that the number of workers increased by 20% and the output increased by 50%. By how
much productivity of labour has changed?h

Question 4

It is known that the number of workers decreased by 20% and the output decreased by 50%. By how
much productivity of labour has changed?

Question 5

Housewife decided to open laundry shop. She expects that annual total revenue from this business will
be 120,000RM.

To start business she needs following:

Rent the office and pay 30,000RM annually for rent.

Hire two assistants and pay each of them 20,000RM per year. Their wage will be paid from revenue.

Buy equipment that costs 60,000RM.

Pay for various expenses (laundry powder, bleach etc). The cost will be 15,000 per annum.

To buy equipment that will serve 10 years she decided to use family savings. Bank interest on deposits is
25% per annum, bank interest on loans is 30% per annum.

Find annual economic and accounting costs.

Accounting cost = rent + wage +
Find annual economic and accounting profit. equipment + expenses + interest = 30000 +
40000 + (60000 /10) + 15000 + (0.3 x
Economic cost = 104500 + (0.25 x 60000) = RM 119500 45000) = RM 104500

AP = 120000 - 104500 = RM 15500

EP = 120000 - 119500 = RM 500
Question 6

With only one input, the slope of the production function is the
(a) Total product
(b) Average product
(c) Marginal cost
(d) Marginal product

Question 7

Consider a price-taking firm with one variable input and (positive) fixed costs. If the marginal cost is a
constant function of output, then the average cost curve will be:
(a) An increasing function of output.
(b) A decreasing function of output.
(c) A constant function of output.
(d) None of the above.

Question 8

What is the law of diminishing marginal productivity?

Question 9

Suppose that output of a good, y, is produced using labor, L, and capital, K. A representative firm in the
industry has the following production function, Y 4 L K .

1. Assume that the quantity of capital is fixed at K = 1. Complete the appropriate column of following
table by calculating the output level for each level of labor.

2. Based on your calculations, plot the production function with output on the vertical axis and labor on
the horizontal axis.

3. What type of marginal productivity (of labor) does the production function exhibit?

4. Now suppose that K = 2. Complete the corresponding column of the table.

5. Compare the level of output when L=4, K=1 and L=8, K=2. What would happen to output if L=16, K=4?
Discuss.

Decreasing marginal
Constant returns to scale.
productivity of labor.
Question 10

Answer all four of the parts below for this question.

1. In a diagram, draw a total cost and total revenue curve for a firm in a perfectly competitive market.
Explain what each of the curves represents.

2. Discuss the relationship between: (a) total revenue and marginal revenue; (b) total cost and marginal
cost.

3. Explain how a firm chooses a profit-maximizing level of output. Illustrate this level on an appropriate
diagram.

4. Show and explain how an increase in the wage that the firm pays its workers would affect the firms
profit-maximizing level of output. Assume that demand for the firms product remains constant.

Question 11

The firm has hired 100 workers. Also, the last hired worker allowed firm to increase output by
20 units. As a result, on average each worker produces 20 units of output. If firm decides to
sack (fire) the last hired worker, by how much the average product of labour of the remaining
99 workers change?
A. By 5 units of output.
B. Will not change.
C. By 2 units of output.
D. Impossible to answer based on information provided.

Question 12

In the factory 10 workers produce 300 units of output per day. Labour is the only variable
production factor. The wage of each worker is 600 ringgit per day. What is the level of average
variable costs (AVC)?
A 20 ringgit
B. 200 ringgit
C. 3 ringgit
D. 30 ringgit

Question 13

When the marginal product of labour curve is below the average product of labour curve,
A. the average product of labour curve has a positive slope.
B. the average product of labour curve has a negative slope.
C. the total product curve has a negative slope.
D. the firm experiences diseconomies of scale.

Question 14

If the average total cost (ATC) curve slopes downward, then at that level of output the marginal
cost (MC) curve must be:
A. sloping upward.
B. sloping downward.
C. above the ATC curve.
D. below the ATC curve.

in the short run, it can change the

Question 15 Fixed labor
technology but the number is still
fixed.
A technological advance:
A. shifts the firms total product curve upward.
B. does not shift the firms total product curve.
C. shifts the firms total product curve downward.
D. cannot occur without raising the firms average total costs and hence shifts the average total
cost curve upward.