Econ 101 Tutorial Questions Theory of Production and Costs

1. Distinguish between the short and long run of a firm. 2. What is the production function? 3. Consider the following production function that relates output to a fixed amount of capital and varying labour. Labour Total Product 0 0 1 3 2 10 3 24 4 36 5 40 6 42 7 42 8 40 a. Compute the values for marginal and average products. b. Sketch the graphs for total product, marginal product and average product. Hence, explain the relationship between marginal product and average product. c. Using the computations in (a), explain the law of diminishing returns. Is this law satisfied?

4. What are the properties of isoquants and their implications? 5. Using examples, distinguish between explicit and implicit costs. Hence differentiate accounting profits from economic profits. 6. Explain why a profit-maximizing firm must also minimize costs. 7. Consider the table below which shows the total fixed costs (TFC) and total variable costs (TVC) for producing special cricket bats in a small factory with a fixed amount of capital. Output/yr (thousands of bats) 1 2 3 4 5 6 7 8 9 10 TFC TVC TC AFC AVC ATC MC

200 200 200 200 200 200 200 200 200 200

40 70 105 120 135 155 185 230 290 350

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200

425

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a. b. c. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

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Compute the TC, AFC, AVC, ATC, and MC for each level of output. At what level of output is the firm at full or total capacity? Sketch the curves and explain the law of diminishing returns using AC and MC curves. Define long run average total cost (LRAC). In light of the fact that businesses are operated dayto-day in the short run, of what use is the concept of long run average cost to an entrepreneur? Explain the difference between diseconomies of scale and diminishing marginal returns. Distinguish between productive efficiency and economic efficiency. Why is average revenue (AR) equal to price when all units of output are sold at the same price. Why does setting marginal revenue equal marginal cost maximize profits? Explain the shutdown condition for a firm operating in the short run. Briefly define the following market structures and cite examples; Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. With the aid of diagrams, clearly distinguish between the short run equilibrium and the long run equilibrium of a monopoly from that of a perfectly competitive firm. Derive the supply curve for a perfectly competitive firm. In the long run, a perfectly competitive industry is said to be stable. Explain. Explain why large firms with considerable market power continue to enjoy little or no competition? What factors may bring may bring rise to such an outcome? Explain what product differentiation entails. Why is the demand curve faced by monopolistic competitors more elastic? Explain the following terms that describe oligopoly behavior; Interdependence, Cheating, Retaliation and Collusion. In spite of the fact that collusive agreements are profitable, why might these arrangements break down? Under which market structures do the following most accurately fit? a. Wheat growers b. Public utilities c. A supermarket in your home area d. Banking industry e. Fertilizer producers f. Television stations g. Restaurants In each case, justify your classification.