Assignment 02

Subject: Business Economics Name: Hareem

Vekriwala(52317)

Program: MBA Max. Marks: 10

Department of Business Administration

Instructions:

Solve all the given problems and upload the file on blackboard under the
assignment 2.

Problem-1: The table shows total production of a firm. If units of labour (L)
increase, find below. 2 marks

Units of Labour Total Product Marginal Product Average Product

(TP) (MP) (AP)
0 0 0 0
1 80 80 80
2 200 120 100
3 330 130 110
4 400 70 100
5 450 50 90
6 480 30 80
7 490 10 70
8 480 -10 60

a. Compute the marginal product of labour (MP) from first to eighth units of labour.

b. Now compute the average product (AP) of the various quantities of labour and
enter them into table.

c. There are increasing return to labour from the first through the 3 units of labor and
decreasing return from the 4th through eighth units.

d. When total production is increasing, marginal product is (positive, negative)

negative and when total production is decreasing, marginal product is positive
Problem -2: The following table gives total output or total product as a function
of labor units used. 2 marks

Labour Total Product

0 0
1 30
2 54
3 72
4 84
5 90

a. Define diminishing returns.

One input in the production of a commodity is increased while all other inputs are
held fixed, a point will eventually be reached at which additions of the input yield
progressively smaller, or diminishing, increases in output

b. Does the table indicate a situation of diminishing returns? Explain your

answer.

The marginal product of the variable input decreases when additional units are added
to the production process.

Problem-3: Consider total cost and total revenue given in the following table.
2 marks
Quantity Total Cost Total Revenue

0 $15 0

1 20 8

2 29 26

3 39 50

4 50 65

5 64 79

6 80 92

7 95 100

a. Calculate profit, marginal revenue, and marginal cost for each quantity. How
much should the firm produce to maximize profit?
TR-TC
 1. 0-15 = -15
2. 8-20= 12
3. 26-29= -3
4. 50-39= 11
5. 50-65= 15
6. 79-64= 15
7. 92-80 = 12
8. 100-95= 5
The firm should produce 5 or 6 units to maximize profit

Problem-4: Consider the units of output, TFC and TVC given in the following
table. 2 marks

Units of Total Total Total Average Averag Average Marginal

output fixed variable cost fixed e total cost
cost cost cost variable cost
(TFC) (TVC) cost
0 150 0 150 - - - -
6 150 50 200 25.0 8.33 33.33 8.33
16 150 100 250 9.38 6.25 15.63 5.0
29 150 150 300 5.17 5.17 10.34 3.85
44 150 200 350 3.41 4.55 7.95 3.33
55 150 250 400 2.73 4.55 7.27 4.55
60 150 300 450 2.50 5.0 7.50 10.0

a. Fill in the columns labeled "Total cost" “average fixed cost” “ average
variable cost “ “average total cost, and "marginal cost"
b. Draw graph of each.

Problem 5: The local government in Karachi is considering two tax proposals:

• A lump-sum tax of Rs. 300 on each producer of Ice-cream.
• A tax of Rs. 1 per unit of Ice-cream, paid by producers of Ice-cream.
2 marks

a. Which cost curves; average fixed cost, the average variable cost, average total
cost, and marginal cost would shift because of the lump-sum tax? Why?
The lump sum tax is similar to increase in fixed cost. Its imposition would shift
average fixed cost upwards, proportionately. It will have no impact on average
variable cost and marginal cost, since variable cost is not affected by lump sum tax.
Average total cost curve would shift upwards as it is sum of average variable cost and
average fixed cost. 

b. Which cost curves; average fixed cost, the average variable cost, average total
cost, and marginal cost would shift as a result of the per-unit tax? Why?
Per-unit tax is a tax imposed on the producer for producing each unit. the average
variable cost curve will shift and hence the marginal cost curve also shifts and Since it
has no influence on fixed cost, the average fixed cost curve will not shift.