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1. Explain how opportunity cost is related to the producer's supply curve.

2. Explain why the minimum price necessary rises as the producer produces more output.

3. Define profit.

4. What are the assumptions of a perfectly competitive market.

5. Describe the demand curve faced by the individual firm. Draw the individual firm's demand curve.

6. Describe the short-run and the long-run.

7. Define diminishing marginal returns. Define marginal product. Explain why diminishing returns occur.

8. Define fixed costs, variable costs, marginal cost, and total costs.

9. Explain how the firm decides whether or not to shutdown.

10. Define average total cost and average variable cost. Calculate ATC, AVC, and MC from the following:

Workers Output Fixed cost Variable cost
per day per day ($/day) ($/day)
0 0 40 0
1 80 40 6
2 200 40 12
3 260 40 18
4 300 40 24
5 330 40 30
6 350 40 36
7 362 40 42
11. If the price per unit of output is 62 cents per unit what will be the profit-maximizing output level?

12. If the wage is $12 per day, instead of $6, and the price is 35 cents per unit, what will be the profit-maximizing output?

13. Draw a graph of MC, ATC, AVC, and price. Find the profit-maximizing output level graphically. Find the area representing profit on the graph.

14. Define producer surplus. Show the area representing producer surplus on a graph.

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1.Explain how opportunity cost is related to the producer's supply curve.

The law of supply is a result of law of increasing costs.

In economics we consider not only the costs which are explicit in nature but also the implicit costs like cost of owner's capital, cost of owner's time, cost of owner's building etc.

Implicit costs are non-accountable and are not reflected in account statements. Economists insist that we should consider the value of each factor of production irrespective of how the factor is owned.

We know that firms tend to maximize their economic profit. In economics normal profit is the profit that owners normally expect to make as return to their investments. This normal profit is treated as opportunity cost. Economic profit is the profit which is earned above normal profit.

If the quantity produced increases, the marginal cost increases.

Seller will produce additional cost only when price they get is equal or higher than marginal cost of producing that additional unit.

So, we can say supply curve represents marginal costs at various output levels.

2. Explain why the minimum price necessary rises as the producer produces more output.

We know that at lower level of production (first stage) fixed inputs are underutilized. When more units of inputs are added, marginal product tends to decrease. In this stage our average costs are high. Marginal costs are much less than average costs in this stage.
When we add more and more variable inputs to generate more output, law of diminishing return says that marginal product tends to decline. In this area marginal costs will tend to increase.

In perfect competitive firms tend to adjust their output level such that MC=Price to maximize their profits.

If demand is increasing, firms will have to produce more with higher marginal costs. Their average costs will also increase. Producers will have to increase their prices to cover up the increased costs otherwise they will be making losses.

It becomes clear that minimum prices will increase as producer produces more output.

3. Define profit.
In economic theory profit refers to difference between sales revenue and the full opportunity cost of resources involved in producing the goods. It takes both implicit and explicit costs into consideration.
Economic Profit = total revenues - (implicit + explicit costs)
Accounting profit = total revenues-explicit costs.
Since economic profit includes opportunity costs, it will always be less than or equal to accounting profit.
Let us try to understand this by an example. John can make a chair at home by working 2 hours. Raw material used is worth $20. Suppose the price of chair is $80.
Explicit costs are : $20 (materials)
Revenue : ...

Solution Summary

There are about 14 questins related to perfect competition, manufacturing costs, producer surplus, demand and supply curves. Overall it explains basic concepts of microeconomics. Answer are explained with the suitable graphs wherever needed.

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