...ADMINISTRATION COURSE: MICROECONOMICS NAME: UDOKANG JANE ENOBONG MATRICULATION NO: 121009632 LEVEL 200 TITLE OF ASSIGNMENT "EXPLAIN IN YOUR OWN WORDS WHAT YOU UNDERSTAND BY THE LAW OF DIMINISHING MARGINAL RETURNS” DEFINITION The Law of Diminishing Marginal Returns states that in a production process, as one input variable is increased there will be a point at which the marginal per unit output will start to decrease. In other words, keeping all other factors constant, the additional output gained by another one unit increase of the input variable will eventually be smaller than the additional output gained by the previous increase in input variable. At that point, the diminishing marginal returns take effect. The examples below will provide some clarity to the Law of Diminishing Returns. Let us consider a corn farmer with one acre of land. In addition to the land, other factors including quantity of seeds, fertilizer, water, and labor. I assume the farmer has already decided how much seed, water, and labor he will be using this season. He is still deciding on how much fertilizer to use. As he increases the amount of fertilizer, the output of corn will increase. It may also reach a point where the output actually begins to decrease since too much fertilizer can become poisonous. The table below shows the output of corn per unit of fertilizer: UNITS OF FERTILIZER | TOTAL OUTPUT OF CORN | MARGINAL OUTPUT OF CORN | 1...
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...1 Cost Concepts Since production involves the use of factor inputs, producers have to pay for these factors in order to carry out production. The payment made to factor inputs represent the cost of production. Such costs can be of different types:1. Explicit and implicit costs Explicit cost refers to the cost of those factors which do not belong to the entrepreneur and for which a payment has to be made. For example wages to workers, the cost of raw materials bought etc… Explicit costs are also known as the paid out costs or the accounting costs. Implicit costs refer to the cost of those factor inputs which belong to the entrepreneur and for which no payment has to be made. For example the interest which is not paid if the producer uses his own capital or the rent which is not paid if he owns the building and premises. Implicit costs are also known as imputed costs or opportunity cost. The distinction between explicit and implicit cost is important mainly because of the difference in the approach to the calculation of profits by the economist and the accountant. To the accountant for instance, profit is total revenue minus total explicit cost while to the economist, the term cost is viewed in terms of opportunity cost and so it should take into account all the alternatives forgone. Thus cost to the economist will be explicit plus implicit. Profits in the economic sense of the word is therefore total revenue minus total explicit cost minus total implicit cost...
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... Explain how a firm can experience diminishing returns in the short-run and economies of scale in the long run. (15 marks) Economies of scale is a long-run concept experienced by firms whereby lower average costs is achieved as a result of an increase in the scale of production. It can occur both internally and externally. Examples of internal economies of scale include: technical, marketing, managerial, financial, network and specialisation of the workforce. The law of diminishing return states that as additional units of a variable factor (such as labour) are added to a fixed factor(such as premises), the extra unit of output from the variable factor will eventually diminish (this is a short-run concept). <Insert cost curve envelope> The above diagram illustrates a cost curve envelope. As a new firm starts to produce a good or service in an industry, they under produce at point Qa. The firm then starts to utilise their resources and eventually reach optimum efficiency as shown in the diagram above at point Qb. If a firm starts to overproduce and over utilise their resources due to massive order by a large firm required within a short time period, they will produce at point Qc at cost AC. At this point, each extra marginal unit of labour added to the fixed cost will produce fewer marginal units of labour and therefore the firm experiences the law of diminishing returns as total output is still increasing but at a diminishing rate. In the long run a firm can...
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...Short run. Investment decision. | 20-3. The change in total output associated with one additional unit of input is the: Opportunity cost of the output. Average productivity. → Marginal physical product. Marginal cost. | 20-4. If a firm could hire all the workers it wanted at a zero wage (i.e., the workers are volunteers), the firm should hire: Enough workers to produce the output where diminishing returns begin. Enough workers to produce the output where worker productivity is the highest. → Enough workers to produce where the MPP equals zero. All the workers that can fit into the factory. | 20-5. Ceteris paribus, the law of diminishing returns states that beyond some point, the: Returns on stocks and bonds diminish with higher security prices. Addition to total utility diminishes as more units of a good are consumed. → Marginal physical product of a factor of production diminishes as more of that factor is used. Output of any good increases as more of a variable input is used. | 20-6. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run? → In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs. The MPP does not change in the long run. In the long run, firms have enough time to find the most qualified workers. All factors of production are fixed in the long run. | 20-7. The most desirable rate of output for a firm is the output...
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...Ch6 DQ.2(a). What are qualitative forecasts? What are the most important forms of qualitative forecasts? Qualitative forecasts are used as supplements for quantitative forecasts when the future conditions of consumer tastes or business expectation changes are anticipated and when quantitative forecast data is not available. Qualitative forecasts are invaluable when forecasting demand for a product that the firm intends to introduce in the market. The most important forms of qualitative forecasts are survey techniques and opinions polls. Both these qualitative forecasts techniques helps to plan on the demand of aproducts for consumers and help plan on expenditure for expansion of the firm. Ch6 DQ.2(b). What is the rationale and usefulness? The survey techniques helps to determine the future of a product or service based on the information provided by the consumers in the survey and the economic activities of the business can be planned based on the results from survey for the companies expenditure on its expansion or other production plans. In case of opinion polling, it helps to determine potential buyers and their requirements and this can help firms to forecast its product demands and improvement of options that will have to be added for customers to buy the goods. Ch6 DQ.3(a). What are time-series data? What are the possible sources of variation in time-series data? Time-series data is the values of a variable arranged chronologically by days, weeks, months, quarters...
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...besa44438_ch06.qxd 09/23/2004 04:18 PM Page 183 6 C H A P T E R INPUTS AND PRODUCTION FUNCTIONS 6.1 INTRODUCTION TO INPUTS AND PRODUCTION FUNCTIONS APPLICATION 6.1 Competition Breeds Efficiency 6.2 PRODUCTION FUNCTIONS WITH A SINGLE INPUT 6.3 PRODUCTION FUNCTIONS WITH MORE THAN ONE INPUT High-Tech Workers versus Low-Tech Workers APPLICATION 6.2 6.4 S U B S T I T U TA B I L I T Y A M O N G INPUTS Elasticities of Substitution in German Industries APPLICATION 6.3 APPLICATION 6.4 Measuring Productivity APPLICATION 6.5 Returns to Scale in Electric Power 6.5 RETURNS TO SCALE Generation APPLICATION 6.6 Returns to Scale in Oil Pipelines APPLICATION 6.7 Technological Progress in the U.K. 6.6 TECHNOLOGICAL PROGRESS Appendix THE ELASTICITY OF SUBSTITUTION FOR A COBB–DOUGLAS PRODUCTION FUNCTION besa44438_ch06.qxd 09/23/2004 04:19 PM Page 184 Can They Make It Better and Cheaper? The production of semiconductor chips—thin, glasslike wafers that are used to store information in digital equipment—is costly, complex, and delicate.1 Production involves hundreds of steps and takes place in facilities called fabs, expensive factories that can cost more than $1 billion to construct. To avoid contaminating chips, fabs must be 1000 times cleaner than a hospital operating room. Because the manufacturing process is so expensive and because a typical fab is obsolete in 3 to 5 years (and...
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...Econ 2101 - Hovander Problem Set 6 - Solutions 1) Define the hypothesis of (eventually) diminishing marginal product both mathematically and verbally. Does this hypothesis hold in the short run or the long run? Explain. The long run is defined as a period of time sufficiently long so that all inputs to production can be freely varied. In contrast, the short run is a period of time sufficiently short so that at least one input is fixed (cannot be varied). For simplicity, let’s make the standard assumption that the variable input in the short run is labor and proceed by defining the hypothesis in terms of labor. The hypothesis of eventually diminishing marginal product states that as we increase labor while holding all other inputs fixed, we will eventually reach a point where the additional output gained with each increase in labor gets smaller and smaller. (e.g. the 5th baker increases output by 3 loaves, the 6th baker by 2 loaves, the 7th baker by 1.) Since the hypothesis is regarding what we expect to see when we vary one input while holding others fixed, this hypothesis is relevant in the short run and not in the long run. Mathematically, the marginal product of labor is MPL = q( L, K ) . L Under the hypothesis of eventually diminishing marginal product (of labor), the following will eventually hold: 2 q( L, K ) 0. L2 (Again, note that this is a partial derivative, so we are hypothesizing this will be true when capital is held fixed, a short-run situation...
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...shows the rate at which one input (e.g. capital or labor) may be substituted for another, while maintaining the same level of output. The MRTS can also be seen as the slope of an isoquant at the point in question. [edit] References • Mas-Colell, Andreu; Whinston, Michael; & Green, Jerry (1995). Microeconomic Theory. Oxford: Oxford University Press. ISBN 0-19-507340-1 [edit] See also • Marginal rate of substitution (the same concept on consumption side) Retrieved from "http://en.wikipedia.org/wiki/Marginal_rate_of_technical_substitution" Categories: Microeconomics | Production economics • marginal rate of technical substitution (MRTS) - The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: a) the slope of the isoquant curve b) the marginal rate ... • Micro Economics - A firm purchases capital and labor in competitive markets at prices r=6 and w=4, respectively. With the firm's current input mix, the marginal product of capital is 12 and the marginal product of labo ... • MRTS - the problem is attached here • law of diminishing marginal returns and the law of diminishing marginal rate of technical substitution - Explain the difference between the law of diminishing...
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...FARM MANAGEMENT Farm management is defined as a decision-making process whereby a decision maker who may be a farmer or a manager allocates his/her limited resources among a number of competing production alternatives to meet the farmer’s goals or objectives. The second part of this definition is similar to a definition of economics, which is often defined as ‘’the allocation of scarce resources’’. Characteristics of management Problem –solving Farm management problems fall into one of three types of production problems, each of which can be put into a form of a question: 1. What to produce? This problem involves selecting the combination of crops and livestock to be produced. Should the business produce only crops, only livestock or some combination? Which crops or crop rotation? Which livestock? The manager must then select from among the many alternatives that combination which will maximize profit or best meet some other goal. 2. How much to produce? Production is determined primarily by the number of inputs used and input level. A manager is faced with the problems of how much fertilizer and irrigation water to use, seeding rates, feeding levels, labour and machinery use, and determining the rates and levels for other inputs. Therefore the level of production and profit will be determined by the input levels selected. 3. How to produce? Many agricultural products can be produced in a number of ways. For example, beef can be produced with a high-grain ration...
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...| A) | a fall in costs as output increases | | | B) | a rise in costs as the price of inputs increases | | | C) | diminishing marginal returns | | | D) | diminishing average returns | | | | | | | | 3 INCORRECT | | The fixed inputs in the short run have: | | | A) | no opportunity cost | | | B) | no payment | | | C) | no short-run economic cost | | | D) | A and CWhy do fixed inputs have no opportunity cost in the short run? Is this related to the fact that short-run economic cost is the same thing as short-run variable cost in the short-run | | | | | | | | 4 CORRECT | | Whenever, marginal cost (MC) is below average variable cost, average variable cost increases. True or false? | | | A) | True | | | B) | False | | | | | | | | 5 CORRECT | | Short-run marginal cost is the change in short-run variable cost due to the production of one more unit of output. True or false? | | | A) | True | | | B) | False | | | | | | | | 6 CORRECT | | At the intersection of the average variable cost curve and the marginal cost curve occurs: | | | A) | at the minimum point of the marginal cost curve | | | B) | at the maximum point of the marginal cost curve | | | C) | at the maximum point of the average variable cost curve | | | D) | at the minimum point of the average variable cost curve | | | | | | | | 7 CORRECT | | A change in characteristics of the output...
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...QCT 3 --6.7 points each for a total of 80 points Salvatore’s Chapter 6: a. Discussion Questions: 1,7, and 15 1: (a) What is forecasting? Why is it so important in the management of business firms and other enterprises? (b) What are the different types of forecasting? (c) How can the firm determine the most suitable forecasting method to use? a) Forecasting is used to try and predict the economic activity of a firm’s future. It aims to reduce risk/uncertainty that is faced in the short-term operational decision making. It is also used to plan for the firm’s long-term growth. Forecasting helps make decisions by using macroforecasts of the general economic activity as inputs for their microforecasts of the industry’s and firm’s demand and sales. Forecasting helps decide a firm’s marketing strategy, production needs, sales forecast, and helps predict financial needs such as cash flow, profits, and outside financing. Furthermore, it helps make personal based decisions, as well as assist for the long-term future of the firm (Salvatore, 2012). b) Forcasting types range from expensive to inexpensive, as well as simple to complex. Forecasting techniques can be qualitative, and others can be quantitative. Salvatore focuses on qualitative forecasts. These forecasts include: time-series, smoothing techniques (moving averages), barometric forecasts with leading indicators, econometric forecasts, and input-output forecasts. c) A firm...
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...| | |Second Semester MBA | |Term Paper | |HUMAN RESOURCE DEVELOPMENT | | | |[pic] | | | | | |"PERFORMANCE APPRAISAL TECHNIQUES | |FOLLOWED IN ROBERT BOSCH" | | ...
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...ANSWERS TO End-of chapter QUESTIONS AND exercises Answers to Questions for Review 1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not? Amos McCoy is not currently making an economic profit, despite the fact that he is making an accounting profit. This is so, because the accounting profit calculation does not take into account an important implicit cost—the opportunity cost of not raising soybeans. Actually, McCoy is experiencing an economic loss. According to our theory, he should get out of the corn business and begin growing soybeans. This question highlights the important distinction between accounting profit and economic profit. 2. (Explicit and Implicit Costs) Determine whether each of the following is an explicit cost or an implicit cost: a) Payments for labor purchased in the labor market b) A firm’s use of a warehouse that it owns and could rent to another firm c) Rent paid for the use of a warehouse not owned by the firm d) The wages that owners could earn if they did not work for themselves a) explicit; b) implicit; c) explicit; d) implicit 3. (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations: ...
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...345x20%+1.5x20%=57% b. What type of returns to scale characterizes this production function? How do you know? 1.345+1.5=2.845>1 so it is increasing return of scale c. Based on the production function, determine an expression for the marginal product of labor if 20 units of capital are employed. K=20 Q=L1.345201.5=89L1.345 MPL=∆Q∆L=89×1.345×L0.345=120L0.345 Q.2 Explain the meaning of a ‘long run average cost curve’. When is it downward sloping? (5 lines) A curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production. when the curve is declining it indicates economies of scale. Q.3 True or False and why? “If it cost $20 on average to produce 100 units of x and it costs $20.20 on average to produce 101 units of x, then the marginal cost when producing unit #101 is 20 cents” It is wrong. MC=∆TC∆Q TC of 100 units is 20x100=2000 TC of 101 units is 20.2x101=2040.2 MC=2040.2-2000101-100=40.2 Q.4 Having just completed a class in “production and costs”, Rohan, the owner of Zee Industries, decided to pay his workers a wage equal to the value marginal product (w =MPL*P). He found out that his labour employment is at a point where MPL>APL. In what stage of production is he operating? Is he maximizing profits at this point? Explain fully It is in the first stage of production. At this point, company is not maximizing its profits...
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...Week 1 Conceptual Exercise: Consumer Behavior Theory 1) A decrease in the price of a particular good, with all other variables constant, causes a. a shift to a different demand schedule with higher quantities demanded b. a shift to a different demand schedule with lower quantities demanded c. a movement along a given demand curve to a lower quantity demanded d. a movement along a given demand curve to a higher quantity demanded e. no movement along a given demand curve unless supply also changes Answer: d. A movement along a given demand curve to a higher quantity demanded Explanation: According to law of demand as the price of good decreases the demand will increase. P P= Price of Good P1 Q= Quantity Demanded P2 Q Q1 Q2 As Price decrease from P1 to P2 Quantity Increases from Q1 to Q2 2) If automobiles are a normal good and the price of automobiles rises, then holding all else constant, the a. demand for automobiles will rise b. quantity demanded of automobiles will fall c. demand for automobiles will fall d. quantity demanded of automobiles will rise e. supply of automobiles will fall Answer: b. quantity demanded of automobiles will fall Explanation: Normal goods are those whose demand increases with increase in income. Now since it is given that the cost of the good rises and all other things remain...
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