Micro

PUNAY, HERRIMAE M BSBA FM 2-4 Exercise 6
1. Assume that data in the accompanying table give an indifference curve for Amrey.
Graph this curve, putting A on the vertical axis and B on the horizontal axis. Assuming
that prices of A and B are 1.50 and 1.00 peso, respectively, and that Amrey has 24 pesos
to spend, add his budget line to your graph. What combination of A and B will Amrey
purchase? Does your answer meet the MRS=MRMS for equilibrium?
Combination Units of A Units of B

A 16 6
B 12 8
C 8 12
D 4 24
Indifference Curve
18
16
16  The
14
12
12
Quantity of A
10
8
8
6
4
4
2
0
5 10 15 20 25
Quantity of B
consumer
obtains more
of product B,
increasing his
or her total
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utility. But
because
total utility is
the same everywhere on the curve, the consumer must give up some of the other
product, A, to reduce total utility by a precisely offsetting amount. Thus, more of B
necessitates less of A, and the quantities of A and B are inversely related.
PPba= $$1.001.50=23
• 2 units of A must be given up obtaining 3 more units of B

• Combination C Amrey will purchase
• MRS=MRMS
Column 1 Column 2 Column 3 Column 4 Column 5
2. Columns 1 through 4 in the table show the marginal utility, measured in utils, that
Melcah would get by purchasing various amounts of products A, B, C, and D. Column 5
shows that marginal utility Melcah gets from saving. Assume that prices of A, B, C, and
D, are P18, P6, P4, and P24, respectively, and that Melcah has an income of P106.
a) How many quantities of A, B, C, and D will Melcah purchase in maximizing her

utility?
MarginalUtilityx
=MarginalUtility perdollar * A = 4 units Pricex
* B = 3 units
* C = 3 units * D = 0 unit
b) How many pesos will Melcah choose to save? How many utils will be her maximum
utility?
- Melcah will choose to save 4 pesos

- She will have 307 utils
- A = 207 utils, B = 51 utils, C = 35 utils , S = 14 utils
c) Check your answers by substituting them into the algebraic statement of the utility –
maximizing rule
MU of A MU of B MU of C MU of S
= = =
Priceof A Priceof B Priceof C Priceof S
MU of A MU of B MU of C MU of S
= = = = = =
Priceof A Priceof B Priceof C Priceof S
2=2=2=2
Draw an indifference
curve of perfectly
3. Perfectly
Graph the Substitute
following Goods
completely: (Good A in X axis and Good B in Y axis)
substitute goods
20
15
Good B
10 b.
5 Perfectly Complementary Goods
0 30
0 2 4 6 8 10 12 1425 16
Good A 20
Good B
15
10
5
0
0 5 10 15 20 25 30
Good A
a.
b. Draw an indifference curve of complementary goods
c. Draw an
indifference map with 4 levels of utilities
Draw the shifting of the original budget line using the situations given from d to i)
d. Real income of the consumer increased
e. Real income of the consumer decreased
f. Price of both goods increased
g. Price of both goods decreased
h. Price of Good A increase but price of Good B is constant
i. Price of Good A increase and price of Good B decrease
Exercise 7
1. Complete the following table:
Inputs of Labor Total Product (TP) Marginal Product (MP) Average Product (AP)
0 0 0 0
1 15 15 15
2 34 19 17
3 51 17 17
4 65 14 16.25
5 74 9 14.8
6 80 6 13.33
7 83 3 11.86
8 82 -1 10.25
a. Plot the total product, marginal product and average products and explain in
detail the relationship between each pair of curves. Explain why MP first
rises, then declines, and ultimately becomes negative.
Inputs of Labor Total Product (TP) Marginal Product (MP) Average Product (AP)
0 0 - -
1 15 15-0 = 15 15
2 34 34-15 = 19 17
3 51 51-34 = 17 17
4 65 65-51 = 14 16.25
5 74 74-65 = 9 14.8
6 80 80-74 = 6 13.33
7 83 83-80 = 3 11.86
8 82 82-83 = -1 10.25
The first 2 units of labor reflect increasing marginal returns, with marginal products of 15
and 19. But beginning with the third unit of labor, marginal product diminishes continuously,
becoming 3 with the seventh unit of labor and – 1 with the eighth. Average product, or
output per labor unit, is shown in column 4. It is calculated by dividing total product (column
2) by the number of labor units needed to produce it (column 1). At 3 units of labor, for
example, AP is 17 (= 51/3).
The total product, TP, goes through three phases: It rises initially at an increasing rate;
then it increases, but at a diminishing rate; finally, after reaching a maximum, it declines.
Geometrically, marginal product – shown by the MP curve – is the slope of the totalproduct
curve. Marginal product measures the change in total product associated with each
succeeding unit of labor. Thus, the three phases of total product are also reflected in marginal
product. Where total product is increasing at an increasing rate, marginal product is rising.
Here, extra units of labor are adding larger and larger amounts to total product. Similarly,
where total product is increasing but at a decreasing rate, marginal product is positive but
falling. Each additional unit of labor adds less to total product than did the previous unit.
When total product is at a maximum, marginal product is zero. When total product declines,
marginal product becomes negative.
This relationship is a mathematical necessity. If you add a larger number to a total than
the current average of that total, the average must rise. And if you add a smaller number to a
total than the current average of that total, the average must fall. You raise your average
examination grade only when your score on an additional (marginal) examination is greater
than the average of all your past scores. You lower your average when your grade on an
additional exam is below your current average. In our production example, when the amount
an extra worker adds to total product exceeds the average product of all workers currently
employed, average product will rise. Conversely, an extra worker adds to total product an
amount that is less than the current average product, then average product will decrease.
2. A firm has Fixed Cost of 60 and Variable Cost as indicated in the table below. Complete
the table.
Graph FC, VC and TC. Explain the behavior or relationship of the curves.
Total variable cost (TVC) changes with output. Total fixed cost (TFC) is independent of the
level of output. The total cost (TC) at any output is the vertical sum of the fixed cost and
variable cost at that output.
B. Graph AFC, AVC, ATC and MC. Explain the behavior or relationship of the curves.
AFC falls as a given amount of fixed costs is apportioned over a larger and larger output.
AVC initially falls because of increasing marginal returns but then rises because of diminishing
marginal returns. Average total cost (ATC) is the vertical sum of average variable cost (AVC)
and average fixed cost (AFC).
Because total variable cost reflects the law of diminishing returns, so must AVC, which is
derived from total variable cost. Because marginal returns increase initially, fewer and fewer
additional variable resources are needed to produce each of the first 4 units of output. As a
result, variable cost per unit declines. AVC hits a minimum with the fifth unit of output, and
beyond that point AVC rises as diminishing returns require more and more variable resources
to produce each additional unit of output.
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PUNAY, HERRIMAE M BSBA FM 2-4 Exercise 6

Combination Units of A Units of B

• 2 units of A must be given up obtaining 3 more units of B

Column 1 Column 2 Column 3 Column 4 Column 5

a) How many quantities of A, B, C, and D will Melcah purchase in maximizing her

- Melcah will choose to save 4 pesos

e. Real income of the consumer decreased

f. Price of both goods increased

h. Price of Good A increase but price of Good B is constant

i. Price of Good A increase and price of Good B decrease

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