ECO10A Marginal Production Assignment Sample

• Subject Code : ECO10A
• Subject Name : Economics

Microeconomics - Section A

Microeconomics - Question 1

1) Production possibilities for Korbus

2) Opportunity cost is defined as the amount of good 1 given up in order to produce more quantity of good 2. From point C, the production of green apples is reducing or given up in order to produce more quantity of honey. Therefore, Korbus is giving up production of green apples to undertake more production of honey. This is known as opportunity cost.

3)

1.3.1 This shift indicates that the production of green apples increases and thus, the production of honey reduces. Suppose initially, the production possibility curve was PPC1. With the increase in the production of apples and assuming the production of honey remaining at the same level, the production possibility curve will shift upwards from PPC1 to PPC2.

1.3.2 When there is an increase in the minimum wage rate, then the production of both the goods would be decreased as larger production will lead to increase in the total expenditure of Korbus. Lower production implies lower wages that is to be paid to the laborers. Therefore, the production possibility curve with shift inwards from PPC1 to PPC2.

1.3.3 With the advancement in capital used for honey production, the production of honey will rise and that of green apples would remain same. More units of honey can be produced with the better technology. There will be rightward shift in production possibility curve. It will shift from PPC1 to PPC2.

4) Revenue = Price x Quantity

The price of green apples = R50 per crate

The price of honey = R560 per box

Production possibilities for Korbus

The total revenue from combination B = R (95*50 + 3*560) = R4750 + R1680 = R6430

The total revenue from combination C = R (85*50 + 6*560) = R4250 + R3360 = R7610

The total revenue from combination D = R (70*50 + 9*560) = R3500 + R5040 = R8540

The total revenue from combination E = R (40*50 + 12*560) = R2000 + R6720 = R8720

The combination E of green apples and honey will yield the highest revenue.

Microeconomics - Question 2

1) Difference between marginal cost, marginal revenue and marginal production

Marginal cost is defined as the change in total cost of production because of production of one more unit (Heathfield, 2016). For example, total cost of producing 9 boxes of honey is R5040 and the cost of producing 10 boxes of honey is R5600. The change in total cost of R560 is the marginal cost.

Marginal revenue is defined as the change in total revenue due to sale of one additional box of honey (Board & Skrzypacz, 2016). For example, when 10 boxes of honey are sold, the total revenue earned from honey is R5600 and the total revenue earned by selling 11 boxes of honey is R6160. The change in total revenue of R560 is known as the marginal revenue.

Marginal production is defined as the change in total production due to production of one more unit of output. For example, the total production of honey increases when more box of honey is produced.

2)

3) The demand for honey is said to be elastic with regard to price as there is availability of substitutes of honey. Therefore, if Korbus increase the price of honey then its demand will decrease as the consumers will start using substitute of honey, say sugar which is relatively cheaper.

4)

Combination D and E would fetch profit to Korbus as in these combinations, the total cost of honey is less than total revenue generated from honey. But, the profit will be maximum from combination E i.e. R1950.

5) Cross price elasticity for tea = -1.23

2.5.1 Tea would be considered as unrelated good in relation to honey because the price of tea cannot affect the demand for honey.

2.5.2 The demand of honey will not change if the price of tea increases because they are unrelated goods.

Microeconomics - Section B

Microeconomics - Question 4

1) The slope of indifference curve is known as marginal rate of substitution. It is the rate at which is willing to give up one product in order to get one extra unit of other product. The negative slope implies that as the Danelle moves from point A to point B then he is willing to give up coffee for extra unit of lasagna.

2)

4.2.1 The total income of Danelle is R180. The price of lasagna is R30 per portion and price of coffee is R20 per cup. The budget line indicates the amount of goods that a consumer can afford with his given income and prices of the goods. The maximum cups of coffee that can be consumed by him with the given income are 9 and maximum portion of lasagne that can be consumed are 6. Yes, the points of interest with the axes depicted in the diagram are correct as 9*20 = R180 and 6*30 = R180.

4.2.2 Slope of budget line s defined as the ratio between the prices of the two commodities. Here, the price of lasagna is R30 per portion and price of coffee is R20 per cup.

Slope = - Price of lasagna/ Price of coffee per cup = -30/20 = -1.5

Therefore, the given value of the slope of budget line is not correct.

3)

4.3.1 There is an inward shift in budget line which indicates that the price of coffee remains the same and the price of lasagna has been changed. This indicates that the price of lasagna has been increased from R30 to R45 due to which the maximum portion lasagna that can be consumed by Danelle is 4 units with the given income of R180. 4 * 45 = R180.

4.3.2 The consumer equilibrium would shift from E to E’ as the price of lasagna has been increased to R45 which lead to the inward shift in budget line. The consumer equilibrium is the point where the consumer achieves the optimum combination of two goods with the given level of income. Before price increase, the consumer is at equilibrium at point E where budget line is tangent to the indifference curve providing the consumer with 6 cups of coffee and 2 portions of lasagna. With the increase in price of lasagna, the consumer is at equilibrium at point E’ consuming 6 cups of coffee and 1.5 portion of lasagna.

Microeconomics - Question 4

4) Arc elasticity of demand of lasagna = % change in quantity/ % change in price

% change in quantity demanded = (New Q – Old Q) / Old Q = (2-1.5)/2 = 0.25*100% = 25%

% change in price = (New price – Old price)/ Old price = (45-30)30 = 50%

Ed = -25/50 = -0.5

There is inverse relationship between price and quantity demanded of lasagne which means that if the price of the commodity increases, the quantity demanded of lasagne decreases or vice versa.

References for Microeconomics

Heathfield, D. F. (2016). An introduction to cost and production functions. Macmillan International Higher Education.

Board, S., & Skrzypacz, A. (2016). Revenue management with forward-looking buyers. Journal of Political Economy, 124(4), 1046-1087.

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