What are the average fixed cost, average variable cost and average cost of a firm? How are they related?
Average Fixed Cost: It is defined as the fixed cost per unit of output.
AFC=
Where, TFC = Total fixed cost
Q = Quantity of output produced
Average Variable Cost: It is defined as the variable cost per unit of output.
AVC=
Where, TVC = Total variable cost
Q = Quantity of output produced
Average Cost: It is defined as the total cost per unit of output. Average cost is derived by dividing total cost by quantity of output.
AC=
AC is also defined as the sum total of average fixed cost and average variable cost.
AC = AFC + AVC
Relationship between AC, AFC, AVC:
1) AVC and AFC are derived from AC as AC = AFC + AVC.
2) The plot for AFC is a rectangular hyperbola and falls continuously as the quantity of output increases.
3) The minimum point of AVC will always exist to the left of the minimum point of AC; i.e., point will always lie left to point M
4) AFC being a rectangular hyperbola falls throughout; this causes the difference between AC and AVC to keep decreasing at higher output levels. However, it should be noted that AVC and AC can never intersect each other. If they intersect at any point, it would imply that AC and AVC are equal at that point. However, this is not possible as AFC will never be zero because it is a rectangular hyperbola that never touches x-axis.
5) AC inherits shape from AVCs shape and it is because of law of variable proportions that both the curves are U-shaped.
What is the supply curve of a firm in the long run?
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
Distinguish between a centrally planned economy and a market economy.
How does the imposition of a unit tax affect the supply curve of a firm?
A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4.
What is the relation between market price and average revenue of a price-taking firm?
What is budget line?
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
What is a production possibility frontier?
What do the long-run marginal cost and the average cost curves look like?
Consider a market with two firms. In the following table, columns labelled as SS1 and SS2 give the supply schedules of firm 1 and firm 2 respectively. Compute the market supply schedule.
Price (Rs.) | SS1 (kg) | SS2 (kg) |
---|---|---|
0 1 2 3 4 5 6 7 8 |
0 0 0 1 2 3 4 5 6 |
0 0 0 0 0.5 1 1.5 2 2.5 |
What does the average fixed cost curve look like? Why does it look so?
Let the production function of a firm be Q=2 L2 K2Q=2 L2 K2
Find out the maximum possible output that the firm can produce with 5 units of LL and 2 units of KK. What is the maximum possible output that the firm can produce with zero units of LL and 10 units of KK?
Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.
Using supply and demand curves show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.
Distinguish between microeconomics and macroeconomics.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
Explain the concepts of the short run and the long run.