FINA251

Solution Sheet
(Review Questions and Answers)
==================================================================================
What is the best definition of Economics?
A study that describes how individuals fulfill their unlimited wants by
limited resources.

What is the most fundamental economic problem?

Wants are unlimited but resources are limited.

What are the four categories into which resources are grouped?
The four categories are land, labor, capital, and entrepreneurship.

What is opportunity cost?

The highest-valued of alternative that forgone.

What is a resource?
A resource is something that is used to produce goods and services.

What is microeconomics?
Microeconomics is the study that talks about individual decision maker.
For example: One topic of study for a micro-economist would be the--
Effects an increase in the price of gasoline has on an individual.

Provide few examples of microeconomics.

 The quality of Al-Baik
 Total sales of Al-Baik
 Khalid like online shopping.
 Osama always study hard.

What are the name of the respective payments for the resources of land,
labor, capital, and entrepreneurship?
The name of the payments are rent, wages, interest, and profit
respectively.

What is capital in economics?

Capital is a complete good that use to produce other goods or services.
What is the difference between a good and a service?
Goods can touch and feel (tangible) but services can’t touch but feel
(intangible).

Why Goods and services are limited?

Goods and services are limited because they are produced using limited
resources.

What is production possibilities frontier (PPF)?

The production possibilities frontier is the boundary between those
combinations of goods and services that can be produced and those that
cannot be produced.

Find the efficient, inefficient, and unattainable points in the above figure
(diagram).
Any point on the PPF curve is efficient point. For example: A, B, C, D, E,
and F are the efficient points.
Any point inside the PPF curve is inefficient point. For example:
point G.
Any point outside the PPF curve is unattainable. For example:
point H.

What shows on the vertical axis and horizontal axis in the production
possibilities frontier (PPF)?
The quantity of one good on the vertical axis and the quantity of another
good on the horizontal axis.
For example: in the above diagram, consumer goods shows on the
vertical axis and capital goods on the horizontal axis.

What is economic growth?

The expansion of production goods and services is called economic
growth.
What are key factors influence economic growth?
Basically there are two factors that influence economic growth. These are
quantity of labor and quality of labor. Higher the quantity and quality of
labor larger economic growth. These two factors influence by other
factors. See the graph in below.

Population
Labor force participation Quantity of labor
Average hours per worker
Total Output

Physical capital
Human capital Labor productivity
Education and training
Job experience
Technology

What is comparative advantage ?

Comparative advantage refers that the individuals must produce that good
and service which has lowest opportunity cost.

What is absolute advantage?

Absolute advantage means being able to produce a product using fewer
resources than other producers require.

If we move along the production possibility frontier, producing more

cotton and less coal like the following figure. What would be the trend of
the opportunity cost of a cotton?

If we move along the production possibility frontier, producing more

cotton and less coal like the above figure. The opportunity cost of a
cotton increases.
With existing resources in the economy, what is the result of the movement
from point D to point C in the above figure?
The movement from point D to point C in the above figure reflect the less
production of cotton and more production of coal.

What are the two categories into which capital is divided?

Two categories of capital is Physical capital and Human capital.
Example of Physical Capital: factories, machines, tools, buildings,
airports, highways and other manufactured items employed to produce
goods and services.
Example of Human Capital: Education, Training, Skills, Job experience
etc.

What does mean by self-interest?

Individuals always try to achieve maximum benefit with a given cost or
minimize the cost of achieving a given benefit.

What are cost and benefit?

Cost is what you must give up to get something and benefit is what you
gain from something.

In an hour (60 minutes), KFC can produce 6 burger’s chicken or 30 salads.

What is KFC's opportunity cost of producing 1 burger’s chicken.
To produce 6 burger’s chickens, KFC sacrifices = 30 salad
To produce 1 burger’s chicken, KFC sacrifices = 30/6 = 5 salad.
So KFC’s opportunity cost of producing 1 burger’s chicken is 5 salad.

In 2 hour time, Khalid can do 2 homework or he can watch 1 movie.

Calculate Khalid’s opportunity cost of doing 1 homework.
If do 2 homework, must sacrifice watching = 1 movie
To do 1 homework, must sacrifice watching = ½ = 0.5 movies.
So, Khalid’s opportunity cost of doing 1 homework is 0.5 movies.

What is demand and quantity of demanded?

The demand for a product is the amount that buyers are willing and able
to purchase at a given price.
Quantity demanded refers the quantity of a commodity that
buyers (consumers) are willing to buy at a particular price at a particular
point of time when other things constant.
What is ‘law of demand’?
The “law of demand” states that changes in the quantity demanded of a
good are inversely related to changes in its price.

What are the main factors (determinants) that change demand? Explain
how it works. The main factors (determinants) of demand are
 The prices of related goods [Substitutes (can serve as
replacements for one another) & Complements (go together)]
Example: For substitutes goods, if an increase in the price of one,
the demand for the other increase and demand curve shifts to
rightward and, conversely, if a decrease in the price of one shifts
the demand for the other good leftward (Example: Pepsi & Coca
Cola)
For complementary goods, if an increase in the price of one shifts
the demand for the other leftward and a decrease in the price of
one shifts the demand for the other rightward (car & petrol).
 Expected future prices, future income and credit: A change in
consumer expectations with respect to future prices, future incomes
& credit shifts current demand.
Example: If individuals expect income and credit to increase in the
future, current demand increases and demand curve shift
rightward. Vice versa also true.
If individuals expect prices to increase in the future, current
demand increases and demand curve shift rightward. Vice versa
also true.

 Income: A change in consumer income change current demand.

Example: Normal goods: the demand increases when income
increases and demand curve shift rightward. The demand
decreases when income decreases and demand curve shift leftward
(example: New car).
Inferior goods: the demand decreases when income increases and
demand curve shift leftward. The demand increases when income
decreases and demand curve shift rightward (example: Used car)

 Population (number of buyers and consumers): Increase in the

number of consumers, increase in market demand it means market
demand curve will shift rightward. Decrease in the number of
consumers, decrease in market demand it means market demand
curve will shift leftward.

 Preferences (tastes): A favorable change in consumer preferences

means If consumer preferences increase for a particular good then
 more of this good will be demanded at each price. Demand will
increase and demand curve will shift rightward. An unfavorable
change in consumer preferences will decrease demand and
demand curve will shift leftward.

If people buy more of good 1 when the price of good 2 rises. What types of
goods are these?
If people buy more of good 1 when the price of good 2 rises, these goods
are substitute goods.

What is supply and quantity of supplied?

Supply refers how much of a particular good producers are willing and
able to sell at a given price during a given period.
Quantity supplied refers the quantity of a commodity that producers
are willing to sell at a particular price at a particular point of time when
other things constant.

Consider the figure above showing supply curves for soft drinks. Suppose
the economy is at point ‘a’. What is the reflection of a movement to point
‘c’?
Suppose the economy is at point ‘a’. A movement to point ‘c’ reflects a
decrease in the price and quantity supplied of soft drinks.

Consider the figure above showing supply curves for soft drinks. Suppose
the economy is at point ‘a’. If the price of soft drinks increase, the
movement will be from point ‘a’ to which point?
If the price of soft drinks increase, the movement will be from point ‘a’ to
point ‘d’.
Consider the figure above showing supply curves for soft drinks. Suppose
the economy is at point ‘a’. If the price of sugar that used to make soft
drinks decrease, the movement will be from point ‘a’ to which point?
If the price of sugar that used to make soft drinks decrease, the movement
will be from point ‘a’ to ‘b’.
Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an increase
in demand?
The demand curve will move to the right when demand increase. The
movement from ‘a’ to ‘d’ reflects an increase in demand.

Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a decrease in
demand?
The demand curve will move to the left when demand decrease. The
movement from ‘a’ to ‘c’ reflects a decrease in demand.

Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a decrease in
quantity demanded but NOT a decrease in demand?
The quantity demanded will decrease when the price increase. The
movement from ‘a’ to ‘b’ reflects a decrease in quantity demand.

Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an increase
in the price of a substitute for fruit snacks?
When the price of substitute good increase then demand will increase for
the fruit snakes. So it reflects the movement from ‘a’ to ‘d’.

Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an increase
in the price of a complement for fruit snacks?
When the price of complementary good increase then demand will
decrease for the fruit snakes. So it reflects The movement from ‘a’ to ‘c’.
Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects how
consumers would react to an increase in the price of a fruit snack that is
expected to occur in the future?
An increase in the expected future price of fruit snake, right now demand
will increase. So it reflects the movement from ‘a’ to ‘d’.

Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a decrease in
population?
When population (buyers/consumers) decrease then demand will
decrease and it reflects the movement from ‘a’ to ‘c’.

What is market equilibrium?

Market equilibrium refers a situation in which the supply of an item is
exactly equal to its demand. Since there is neither surplus nor shortage in
the Market. A price below the equilibrium price results in a shortage and
a price above the equilibrium price results in a surplus.

What is the market equilibrium price in the above figure?

The equilibrium price is $6.

What is the market equilibrium quantity in the above figure?

The equilibrium quantity is 300 units.

What is the market situation at a price of $10 in the above figure?

The surplus will occur by 400 units (supply is 500 but demand is 100. So
surplus = 500 – 100 = 400).

What is the market situation at a price of $4 in the above figure?

The shortage will occur by 200 units (demand is 400 but supply is 200. So
shortage = 400 – 200 = 200).
What are the main factors (determinants) that change supply? Explain
how it works. The main factors (determinants) of supply are

a. Prices of Relevant Resource (Factors of production)

Relevant resources are those employed in the production of the good in
question. If the price of some relevant resource increases then production
cost increase. As a result the amount of production will decrease and
supply decreases. The supply curve shifts to the left.
If the price of some relevant resource decreases then production
cost decrease. As a result the amount of production increase and supply
increases. The supply curve shifts to the right.
b. Technology
If a more efficient technology is discovered, same resource can produce
more. The suppliers will be more willing and able to supply the good and
the supply curve will move to the rightward.
If firm does not use technology, the production will be less. The
supply will be less and the supply curve will move to the left.
c. Prices of Related Goods produced
If the price of substitute good increase, the supply of the original good
decrease and decrease the price of substitute good will lead higher the
supply of original good. For example, if the price of Soybean oil
increases then firm will use more resources to produce it and less
resources to produce corn oil. The supply of corn oil declines and supply
curve for corn oil shifts leftward. Conversely, a fall in the price of
soybean makes corn oil production more profitable. The supply for corn
oil increases and supply curve shifts rightward.
If the price of complementary good increase, the supply of the
original good increase and decrease the price of complementary good
will lead lower the supply of original good.

d. Producer Expectations on future prices.

Changes in producer expectations with respect to the future can change
current supply. If suppliers expect higher prices in the future, they may
begin to stock their product today current supply decreases  supply
curve shifts leftward.
If suppliers expect lower prices in the future, they will try to sell all
of their products today current supply increases  supply curve shifts
rightward.

e. Number of Sellers (suppliers)

If the number of producers increases, supply increases  supply curve
shifts to the right. If the number of producers decreases, supply will
decrease  supply curve shift to the left.

f. Taxes, Subsidies, & State of Nature

Businesses treat most taxes as costs. An increase in sales or property
taxes will increase production costs and reduce supply, supply curve
shifts leftward. Vice versa also true. If government subsidizes the
production of a good, it reduce the producers production costs and
supply increase and supply curve shifts rightward. Vice versa also true.
The state of nature includes all the natural forces that influence
production—for example, the weather. Any favorable natural forces
increases amount of production which turn to increase supply and shifts
the supply curve rightward. Any unfavorable natural forces decreases
amount of production which turn to decrease supply and shifts the supply
curve leftward.
Q. If demand increases and supply decreases, what is the effect on equilibrium price
and equilibrium quantity?
The price must rises and the quantity is indeterminate (might increase, decrease or
remain the same).
(Please see the following graph)

P P
r r
i i
c c
e e

S<D (PQ) S>D (PQ)

P
r
i
c
e

S = D (PQ remain same)

Q. If demand and supply both increases, what is the effect on equilibrium price and
equilibrium quantity?
The price is indeterminate (might increase, decrease or remain the same) and the
quantity must increases.
(Please see the following graph)

S > D (PQ) S < D (PQ)

 S = D (P remain same, Q )

Q. If demand decreases and supply increases, what is the effect on equilibrium price
and equilibrium quantity?
The price must falls and the quantity is indeterminate (might increase, decrease or
remain the same)
(Please draw graphs for 3 situation like above and see the impact)

Q. If demand and supply both decreases, what is the effect on equilibrium price and
equilibrium quantity?
The price is indeterminate (might increase, decrease or remain the same) and the
quantity must decreases.
(Please draw graphs for 3 situation like above and see the impact)

Q. In the market for oranges, the demand and supply of oranges decrease by the
same amount. The equilibrium quantity will and the equilibrium price will be
.
Decrease, the same

Q. What is price elasticity of demand and how is it measured?

Price elasticity of demand measures the responsiveness of the quantity demanded to
changes in price.
To calculate the price elasticity of demand, we divide the percentage change

in quantity demanded by the percentage change in price.

Q. What is the sign of calculated Price elasticity of demand?

Always –

Q. What are the categories of price elasticity of demand?

There are five categories of price elasticity of demand. These are
a. Elastic demand. It occur when the value of ED (price elasticity of demand) is more
than 1.
b. Inelastic demand. It occur when the when the value of ED (price elasticity of demand)
is less than 1.
 c. Unit elastic demand. It occur when the value of ED (price elasticity of demand) is
equal 1.
d. Perfectly elastic demand. It occur when the value of ED (price elasticity of demand) is
∞.
e. Perfectly inelastic demand. It occur when the value of ED (price elasticity of demand)
is 0.

Q. If the percentage change in quantity demanded ( ) is greater than the

percentage change in price ( ), Then the demand is elastic or unit elastic or
inelastic?
If ( ) is greater than ( ), the demand is always elastic.

Q. If the percentage change in quantity demanded ( ) is smaller than the

percentage change in price ( ), Then the demand is elastic or unit elastic or
inelastic?
If ( ) is smaller than ( ), the demand is always inelastic.

Q. If the percentage change in quantity demanded ( ) is equal to the

percentage change in price ( ), Then the demand is elastic or unit elastic or
inelastic?
If ( ) is equal to ( ), the demand is always unit elastic.

Q. What Are the shapes of elastic, inelastic, unit elastic, perfectly elastic, and perfectly
inelastic demand curves?

(Shape of Elastic Demand Curve) (Shape of Inelastic Demand Curve)

(Shape of perfectly elastic demand curve) (Shape of perfectly elastic demand

curve)
 (Shape of unit elastic demand curve)

Q. In what value of price elasticity of demand, total revenue for a good is at a

maximum.
The value ED must be equal 1 that means demand of the good must be unit elastic.

Q. The price elasticity of demand for Al-Baik is 8. If the price of an Al-Baik increased
by 4 percent, Calculate the quantity demanded for Al-Baik. Explain the result.

Here %P = 4, price elasticity of demand for Al-Baik ED = - 8

We know price elasticity of demand

So, -8=

-
%Qd = 8 x 4 = -32

Quantity demanded of Al-Baik will be decreased by 32 percent with the 4 percent in

price.

Q. If the price of Al Baik increases from $6 to $8 per box and quantity demanded
decreases from 1000 boxes to 900 boxes. What is the price elasticity of demand for
Al-Baik?

We know price elasticity of demand

New Qd – Old Qd 900 – 1000 -100

%Qd = ------------------------ X 100 = ------------------X100 = ---------X100 = -10.52
(New Qd + Old Qd) (900 +1000) 950
------------------------ -----------------
2 2
(Here, New Qd = 900, Old Qd = 1000)

New P – Old P 8–6 2

%P = ---------------------------- X 100 = ---------X100 = ----------X100 = 28.57
(New P + Old P) 8+6 7
------------------------ --------
2 2
(Here, New P = $8, Old P = $6)
 So the price elasticity of demand

Q. What is the value of elasticity of demand at the midpoint of a linear demand curve?
The elasticity of demand at the midpoint of a linear demand curve is always 1. It means
demand is unit elastic.

Q. What is the value of elasticity of demand at above (upper part) of the midpoint of a
linear demand curve?
The elasticity of demand at any point above (upper part) the midpoint of a linear demand
curve is always more than 1. It means demand is elastic.

Q. What is the value of elasticity of demand at above (upper part) of the midpoint of a
linear demand curve?
The elasticity of demand at any point below (lower part) the midpoint of a linear demand
curve is always less than 1. It means demand is inelastic.

Q. If the cross elasticity of demand between goods A and B is positive and between
goods C and D is negative, then what is the nature of goods A and B, and D and C.
If A and B are substitute goods then the cross elasticity of demand between goods A and B is
positive.
If C and D are complementary goods then the cross elasticity of demand between goods
C and D is negative.

Q. ‘The price elasticity of demand is constant along a linear demand curve’. Is this
statement true or false?
False. The price elasticity of demand decreases when moving downward along a linear
demand curve.

Q. When the price of petrol rises 2 percent, the quantity demanded of car falls 4
percent.
a) What is the cross elasticity of demand between these two goods?
b) How are these goods related?
%Qd for Car -4
a) The cross elasticity of demand equals -2. (EC = ----------------------= --------------= - 2)
%P for Petrol 2
b) Because the cross elasticity of demand is negative, the cross elasticity indicates that
the two goods are complements.

Q. What is the relationships between total revenue (TR) and Price Elasticity of
Demand?
a. If demand is elastic, Increase in price led the decrease in total revenue (PTR) and
a decrease in price led the increase in total revenue (PTR).
b. If demand is inelastic, Increase in price led the increase in total revenue (PTR)
and a decrease in price led the decrease in total revenue (PTR).
c. If demand is unit elastic, No change in total revenue with the change in price.
Q. If the income elasticity for good A is positive, then what is the nature of goods A?
If the income elasticity of good A is positive, the good A is normal good.

Q. If the income elasticity for good A is negative, then what is the nature of goods A?
If the income elasticity of good A is negative, the good A is inferior (used ) good.

Q. What is utility and Marginal utility?

Utility: The satisfaction that a person receives from consuming a good or service is
called utility (total utility).
Marginal utility (MU): Additional utility from an additional unit of consumption is called
marginal utility.
Q. What is diminishing marginal utility?
The principle of diminishing marginal utility implies a decrease in marginal utility as the
quantity consumed increases.

Al-Baik Khalid's total

(Units per week) utility
0 0
1 10
2 16
3 20

Q. From the above table, calculate the marginal utility from the 3rd unit of Al-Baik.
Marginal utility from the 3rd unit of Al-Baik (MU3) = TU3 – TU2 = 20 – 16 = 4 utils.
Marginal Marginal
Al-Baik utility from Quantity of utility from
(Units per Al-Baik Pizza Pizza
week) Price of (MUal-baik) Price of (MUpizza)
1 Al-Baik 56 1 Pizza 40
2 (P al-baik = $8) 32 2 (P pizza = $4) 28
3 24 3 20
4 18 4 12
5 12 5 8
Q. Given the data in the above table, income of $40 per week, a price of $8 for an Al-
Baik and $4.00 for a Pizza, what are the marginal utilities per dollar spent on the 5th
Al-Baik and Pizza.
Per dollar marginal utility for 5th Al-Baik = MU5(Al-Baik)/P(price of Al-baik) = 12/8 = 1.5 utils
Per dollar marginal utility for 5th Pizza = MU5(pizza)/P(price of pizza) = 8/4 = 2 utils

Q. What are the conditions that a consumer needs to fulfill for utility
The two conditions must needs to fulfill.
1. Consumer has to spent all his/her allocated income
2. His/her marginal utility per dollar must be equal for all goods.
 Labor
Total product
(workers)
0 0
1 10
2 25
3 45
4 60
5 70

Q. Using the data in the above table, calculate the marginal product of the 3 rd worker,
the average product of 4 employees?
Formula, MP = TP (Total Products)/TR(Total Resources)
So, MP for 3rd worker = = (TU3-TU2)/(3-2) = (45-25)/(3-2) = 20

Formula, AP = TP/TR
AP for 4 worker = 60/4 = 15

Q. What is the relationship between MP and AP?

– Whenever MP is greater than AP, AP is rising.
– Whenever MP is less than AP, AP is falling.
– Whenever MP is maximum than AP is less than MP.
– Whenever MP becomes negative, the AP would be positive because AP never
be negative.
Q. What is short run and long run?

Short run refers a time period in which at least one resource must be fixed.
Long run refers a time period in which all resources are variables or changeable.

Q. What is diminishing marginal returns?

"Diminishing marginal returns" refer to a situation in which the marginal product of
the last worker hired is less than the marginal product of the previous worker hired.
Q. What is total revenue? How to calculate it?
Total revenue is the amount of money that company receive by selling their products.
We can calculate total revenue by the following formula:
TR = P(per unit) X Q(quantity that sold)

Quantity sold Price

5 $15
6 $15
7 $15

Q. In the above table, if the firm sells 6 units of output, how much its total revenue is?
Formula, TR (Total Revenue) = P (per unit) x Q (that sold) = $15 x 6 = $90
Q. In the above table, if the quantity sold by the firm rises from 6 to 7, how much its
marginal revenue (MR) from 7th unit?
The marginal revenue (MR) =  in total revenue/  in total sells)
Here total revenue from 7 units = 15 x 7 = $105
Total revenue from 6 units = 15 x 6 = $90
The marginal revenue (MR) from 7th unit = (105 – 90)/(7-6) = 15/1 = $15
Q. What is the relationship between MP and MC?
Whenever MP increase then MC must decrease.
Whenever MP decrease then MC must increase.
Whenever MP is maximum then MC is minimum.

Q. What is the effect on the economic profit due to the changes in the output? If
i. MR > MC
ii. MR < MC
iii. MR = MC

Answer:
 Use the figure below to answer the following question:

Q. In the above figure, what are the cost curves represents by 1, 2, 3,

and 4?
Curve 1 represents marginal cost (MC)
Curve 2 represents average total cost (ATC)
Curve 3 represents average variable cost (AVC)
Curve 4 represents average fixed cost (AFC).

Q. What is the Total cost calculation formula?

Total Cost (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)

Q. What are the calculation formulas for TFC and TVC?

TFC = TC – TVC
and TVC = TC –TFC

Q. How do we calculate total costs, total fixed costs, total variable costs,
marginal cost, average total cost, average fixed cost, average variable
cost?
By using the following formulas we can calculate------
Total Costs (TC) = Total fixed costs (TFC) + Total variable costs (TVC)
Total Fixed Costs (TFC) = Total costs (TC) – Total variable costs (TVC)
Total Variable Costs (TVC) = Total costs (TC) – Total fixed costs (TFC)
Average Total Costs (ATC) = Total Costs (TC)/Total output (TQ)
Average Fixed Costs (AFC) = Total Fixed Costs (TFC)/Total output (TQ)
Average Variable Costs (AVC) = Total Variable Costs (TVC)/Total output (TQ)
Marginal Cost (MC) = change in total costs (TC)/change in output (TQ)

Q. What is Total Fixed Cost (TFC), Total Variable Cost (TVC), and
Marginal Cost (MC)?
Total Fixed Cost (TFC) is the cost that does not change with output levels
Total Variable Cost (TVC) is the cost that changes with output levels
Marginal Cost (MC) is the cost that occurred for additional unit of output.
Q. Is there any costs that company must bear when output is ‘0’? If yes,
what is the name of that cost?
Yes, firm must bear a cost though it’s output is 0 (zero). The name of the cost
is Fixed Cost.

Q. If Al-Baik in Jeddah branch pay 25 SAR to each worker and the total
fixed cost is 100 SAR and other information is given in the following
table. Based on these information, complete the table.

Number of
Total product
labor TFC TVC TC AFC AVC ATC MC
(TP)
(workers)
0 0
1 5
2 15
3 35
4 50
5 60
6 65

Answer: Use calculation formulas are .

(TC) = (TFC) + (TVC)
(TFC) = (TC) – (TVC)
(TVC) = (TC) – (TFC)
(ATC) = (TC)/ (TQ)
(AFC) = (TFC)/ (TQ)
(AVC) = (TVC)/ (TQ)
(MC) = (TC)/ (TQ)

number of
Total product
labor
(TP)
(workers) TFC TVC TC AFC AVC ATC MC
0 0 100 0*25 = 0 100+0 = 100
1 5 100 1*25 = 25 100+25 = 125 100/5=20 25/5=5 125/5=25 25/5=5
2 15 100 2*25 = 50 100+50=150 100/15=6.67 50/15=3.33 150/15=10 25/10=2.5
3 35 100 3*25 = 75 100+75=175 100/35=2.86 75/35=2.14 175/35=5 25/20=1.25
4 50 100 4*25 = 100 100+100=200 100/50=2 100/50=2 200/50=4 25/15=1.67
5 60 100 5*25 = 125 100+125=225 100/60=1.67 125/60=2.08 225/60=3.75 25/10=2.5
6 65 100 6*25 = 150 100+150=250 100/65=1.54 150/65=2.31 250/65=3.85 25/5=5

Q. What are the characteristics (requirements) for perfect competition?

There are mainly four characters of perfect competition market. These are as
follows:
a. Companies selling standardized products.
b. Free entry and exit into the market.
c. companies are price taker.
d. A large numbers of buyers and sellers in the market.
Q. What are the profit maximization approaches in perfect competition
market in short run?
There are two approaches. These are as follows:
a. Total revenue – total cost approach
b. Marginal revenue – marginal cost approach.

Q. What is profit maximization Marginal revenue – Marginal cost

approach?
Profit is maximized by producing the output at which marginal revenue (MR), equals
marginal cost (MC) i.e. MR = MC.

Q. What are the production (business) decision rules in perfect

competition market in short run?
Company must continue its production or business if it can realize:
a. A profit OR
b. A loss which is less than its fixed costs.

Q. What is the relationship between price (P) and marginal revenue

(MR) for a perfectly competitive firm?
Price (P) always be equal to marginal revenue (MR) i.e P = MR.

Q. What would be the profit maximizing output level of a company in

perfect competition market?
The profit maximizing output level would be that amount where MR = MC.

Q. If a competitive company enjoy more marginal revenue than

marginal cost (MR>MC), what that company should do in terms of
production?
This company must increase its production as economic profit increases with the
increase of output. It will continue until it become MR=MC.

Q. If a competitive company experiences less marginal revenue than

marginal cost (MR<MC), what that company should do in terms of
production?
This company must decrease its production as economic profit increases with the
decrease of output. It will continue until it become MR=MC.

Quantity Total Profit,

Total revenue Total cost,
(pounds of (dollars)
(dollars) (dollars)
cookies) Profit = TR-TC
1 15 13 2
2 30 24 6
3 45 38 7
Q. Calculate the total profits for each level of output and fill in the last
column in the above table.
Profits (if quantity 1) = 15 – 13 = 2
Profits (if quantity 2) = 30 – 24 = 6
Profits (if quantity 3) = 45 – 38 = 7

Q. Which level of output is the profit maximizing output in the above

table?
Output level 3 where company can make profit 7 dollars.