Introduction to Economics (Econ -201)

Group Assignment -I (125 % marks)

GENERAL INSTRUCTION;

Only you can attempt 3 questions from discussion part and 4 question works- out part.

A. Discussion
1. Discuss the Stages of production cycle in short run. Draw the total product curve explain how its
shape reflects the law of diminishing marginal returns.
2. Explain how marginal product and average product of variable input like labor would change as
more of inputs used in short run. Identify point of diminishing marginal productivity and explain
stages of production using TPL, MPL and APL curves.

3. Discuss the relationship between each of the following pairs of production and cost curves and
explain the relationship between AVC, ATC and MC curves show how the shapes of average and
marginal cost curves reflect the law of diminishing marginal returns.
A. MC and MPL
B. AVC and APL
C. TPL and TVC
4. Why ATC, AVC and MC are U- shaped and APL and MPL curves are mirror image or inverted
U-shaped assuming labor is the only variable input?
5. Compare and contrast perfect competition and monopolistic competition Market structures.
6. Explain determinates of Price elasticity of demand give example of each.

B. Work outs
7. Calculate Price elasticity of demand
 A. The price of milk in litters raises from 10 to 12 birr as a result the weekly quantity demanded
decreases from 100 to 90 liters. Calculate price elasticity of demand using point and arc
elasticity. Interpret your results what type of the good is it.
8. Calculate Price elasticity of demand and its effect on total revenue approach.
A. When demand is price elastic for the good what will happen to the total revenue if there is an
increase in price?
9. Calculate Price elasticity of supply
A. The supplies of good increases from 200 units to 300 units, due to an increase in price of a
good by 10 percent Calculate Price elasticity of supply interpret your results.
B. A 10% decrease in price results in a 20% percent decrease in quantity supplied, calculate price
elasticity of supply, and interpret your results.
10. Calculate Income elasticity of demand
A. The income of consumer increases 1000 to 2000 birr and the quantity demand for X good
decreases from 6kg to 4 kg calculate Income elasticity of demand and interpret your results.
11. Calculate Cross price elasticity of demand
A. The price of sugar increases from 10 to 15 birr the demand for tea decreases from 2 to 3 units
calculate the cross price elasticity of demand for these goods and interpret your results.
B. If the cross price elasticity of demand for electricity with respect to price of natural gas is
calculated 0.3, interpret what you mean by these and what type of these goods are they.
12. Suppose that short run production function of an industry given by Q=60L 2 -4L3
A. Compute APL and MPL
B. Find the labor employment levels the law of marginal returns starts to operate.
C. Find the labor employment levels where total product is maximum.
D. Find the labor employment levels that define stage II of production or feasible stages of
production, show the stages of production for firm graphically.
13. suppose a perfectly competitive firm cost function is given by C=1200+16q-6q2+q3
Demand and supply functions are given Qd= 191-3.5P Qs=127+0.5P by respectively.
On the above given information.
A. Calculate the equilibrium price or the marginal revenue. (P=MR )
B. Determine the optimal level of output that maximizes profit. (Hint MR=MC)
C. Find the maxim profit or loss.
14. Fill or Complete the following cost schedules

(Q) output TFC TVC TC AFC AVC AC/ATC MC

O
1 1500 800
2 1000
3 400

15. Suppose one student in you class wants to start new business of local shoe factory at his own
home which will be rented 4000 birr per year, and he produces 400 pair shoes per year. The price
of shoe per pair was sold 100 birr and gets 40,000 birr total revenue. The student earns 6,000 birr
per year as he was working in governmental offices before. The annual costs of purchased inputs
are as follows…
Machine rent - 5000
Leather - 10000
Plastic sole - 5000
Labor wage - 5000

Utility expenses -3000

A. Calculate implicit cost and explicit costs (accounting costs) of a firm.

B. Calculate economic profit and calculate the accounting profits of firm.
C. Which one of them better guides for resource allocation is it accounting or economic profit, why?