EC100 TUT 2

1. Define Short and Long Run.

SR is a time frame when in which the qty of some resources are fixed. For most firms, fixed resources are the firms’ technology, buildings, and capital. It is the point where AVC and ATC are equal. Meaning that we don’t show AFC in the SR.

LR is time frame in which the qty of all resources can be varied. That is, the LR is a period in which the firm can change its plant.

2. Discuss the principle of the Law of Diminishing Returns.

As a firm uses more of a variable input, with a given qty of fixed inputs, the MP of the variable input eventually diminishes. – MP is the change in TP resulting from a 1 unit increase in the qty of labor employed.

3. Suppose the following information being given for a competitive firm; AC = VT10 per unit; MC = VT5, AVC =VT8 at the output level. The output produced is 100 units.
a. Is the firm operating in the LR or the SR? Explain.

SR > AVC should be equal ATC (Theory of the Firm)

AVC = VT8; Now we have to define ATC

ATC (AC) = AFC + AVC
VT10 = AFC+VT8
AFC =VT 2

ATC = AFC + AVC
ATC = VT2 + VT8
ATC = VT10 > AVC = VT8


b. Calculate AFC

ATC (AC) = AFC + AVC
VT10 = AFC+VT8
AFC =VT 2

c. Calculate TVC.

From cost productions: pg 99 Course Book

AVC = TVC/Q
AVC * Q = TVC
TVC = VT8 * 100
TVC = VT800

d. Calculate TFC.

From cost productions: pg 99 Course Book
AFC = TFC/Q
TFC = AFC * Q
TFC = VT2 * 100
TFC = VT200


e. What is TC?

VT1000


















4. Sketch AC, AVC, AFC and MC



5. Explain why we pay particular attention to the MC of a firm?

The MC Curve will determine how much additional output a firm will supply in the SR as its cost changes. (From pg 102 Course Book)

6. Differentiate between a fix cost and variable cost.

FC relates to items such as the cost of renting premises and land, the cost of repayment interest and capital on borrowed funds including cost of depreciation on equipment.

AC incurred as the firm starts to produce.

7. Plot the Supply Curve from the information below

Supply Schedule for Coke

Price per Can (VT) Qty Supplied (Can)
A 400 5
B 350 4
C 300 3
D 250 2
E 200 1
F 150 0

8. Show the effects of a decrease in the cost of production to your Supply Curve in Question 6 (Hint will the Supply Curve shifts inwards or outwards?)