ECONOMIC PRINCIPLES

ASSIGNMENT

TOTAL MARKS 20

(All questions are of equal value, i.e. worth 2 marks)

The ABC Company is a small manufacturing company operating in a highly competitive

industry. You are employed by the company as their economic advisor. The company wants
you to examine their cost structure, production efficiency, profitability and future trends in
market behaviour.

The following cost schedule is presented to:

Quantity Fixed Cost Variable Total Cost Marginal Average Average

(Q) ($) Cost (VC) ($) Cost (MC) Variable Total Cost
($) ($) Cost (AVC) (ATC)
($) ($)
0 46 0
1 30
2 96
3 58
4 64
5 116
6 80
7 94
8 164
9 144

1. Fill in the table and graph the results using an excel spread sheet .
2. Explain what is meant by diminishing returns. From these costs curves explain when
diminishing returns sets in? Why?
3. Explain the relationship between ATC, AVC and AFC.
4. What is the ABC Company’s efficient scale? Why?
The ABC Company sells its product at the market price of $ 24. Complete the following table.

Quantity Marginal Total Profit

(Q) Revenue Revenue ($)
($) ($)
0
1
2
3
4
5
6
7
8
9

5 Explain the conditions under which profit maximisation occurs. What is the firm’s profit
maximising output?
6 Graph the firm’s profit maximisation position.
7 Using the firm’s profit maximisation graph, explain whether the company will continue
to operate in the short and long run at the market price of $ 24
8. If this firm is typical of firms in the industry what will be the industry’s long run price
and the firm’s long run profit position? Explain the process by which the industry and
the firm adjust to this long run position. Will the industry experience and increase or
decrease in the number of firms in the long run? Why?
9. A university researcher develops a technological break-through that lowers costs. Using
an excel spread sheet, calculate the firm’s new cost structure if fixed costs decrease to
$20. Determine what happens to the efficient scale? What happens to ABC Company’s
profit in short and long run? What will be the long run equilibrium price?
10. A change in government labour policy lowers the wages of workers that ABC Company
and similar firms employ. At each output variable costs decline by $ 4 while fixed cost
remains at its original level of $ 46. Using an excel spread sheet describe what happens
to ABC’s profit in the short run and long run? What happens to the long run equilibrium
price?