Microeconomics
ANSWER SHEET
Question 1: Answer the following questions: (3 Marks)
- Why is the production possibility frontier bowed outwards? Give an example. (2 marks)
The PPF curve outwards to show the increasing opportunity cost. It is because the different resources have different productivity in all firm’s activities.
Example:
An example of the PPF productivity cost is the productivity of experienced workers producing guns, for one company. Their productivity of weapons is high because of experience and specialization. But if taken to another company to provide butter, they cannot achieve much. It is because they lack specialization
- If the production possibility frontier was a straight line, and then there is still tradeoff, what will happen to the value of opportunity cost as we produce more of one good? (1 mark)
The opportunity cost of the one good produced goes up because of specialization while the
The opportunity cost of the other items goes down.
Question 2: The firm faces three constraints that limit the number of profits it can make. Explain these constraints? (3 Marks)
- Technology Constraints:
The amount of profit realized by a firm is determined by the technological advances and the technology available in the firm.
- Information Constraints:
A business is constrained by insufficient information about the hard work and quality of its workers. It also affects the present and plans of market competition and strategies for buying by its customers.
- Market Constraints:
Marketing constraints and the cost incurred to meet them limit the number of profits. Firms spend a lot of money in the first years of marketing and selling their products. All firms work hard to overcome this constraint.
Question 3: Answer the following questions: (5 Marks)
- Why is the demand curve facing each firm in a perfectly competitive market horizontal? (3 marks)
The demand curve for a competitive firm is flat because a competitive business can’t control its product price but agrees with the market price as it is established. It can only regulate productivity to create and sell its products.
- Explain the two kinds of barriers to entry that exist in a monopoly. (2 marks)
A monopoly business has to overcome natural and legal obstacles to enter the market structure
- i) Legal Barrier to Entry:Theseare barriers in which entry and aspect of the competition are controlled by government license, copyright, public franchise or copyright. These factors create a legal monopoly
; ii)Natural Barriers to Entry:They are barriers that result in natural trust. It can be a structure of a market where a firm can supply and meet all the market demands at a meager cost than all other businesses.
Question 4: Salem has a firm with the following short-run production function. The total fixed cost of the firm is AED 1,500. The firm pays a wage rate of AED 300 per day for each worker. The firm’s only variable cost is the wages it pays to workers. Calculate the following: (8 Marks)
| Number of Workers | Total Output (Product) (per day) |
| 0 | 0 |
| 1 | 30 |
| 2 | 55 |
| 3 | 75 |
| 4 | 90 |
| 5 | 100 |
- The average fixed cost (AFC) when the total output is 75 units. (2 marks)
AFC=150075=20
- The average variable cost (AVC) when the total output is 75 units. (2 marks)
AVC= (3)75=12
- The average total cost (ATC) when the total output is 75 units. (2 marks)
ATC=AFC+AVC
ATC=20+12
ATC=32
- The marginal product (MP) of the fourth worker. (2 marks)
MP of the fourth worker=90-75=15
Question 5: The following is information about the number of workers employed by a firm and total output produced along with the wage of AED 600 for each worker. Besides, each unit of output is sold at a price of AED 10. You have to answer the following questions: (6 Marks)
- Fill in the empty cells in the table. (0.25×18= 4.5 marks)
| Number of workers | Total Output | Marginal Product of Labor (MPL) | Value of Marginal Product of Labor VMPL = P x MPL | Wage per Worker W | Profit Margin (PM)PM=VMPL-Wage |
| 0 | 0 | – | – | – | – |
| 1 | 120 | 120 | 1200 | 600 | 600 |
| 2 | 220 | 100 | 1000 | 600 | 400 |
| 3 | 300 | 80 | 800 | 600 | 200 |
| 4 | 360 | 60 | 600 | 600 | 0 |
| 5 | 400 | 40 | 400 | 600 | -200 |
| 6 | 420 | 20 | 200 | 600 | -400 |
- State the condition that the firm should meet to maximize his profit. (0.5 marks)
Maximum benefit is realized when the marginal product is equal to the average product
- How many workers should this firm employ to maximize his profits? (1 mark)
To maximize profit, the firm must employ two workers.