Assignment 2: Course Title: ECO101

Assignment 2
Course Title: ECO101.
Name: Rashik Ahmed.
ID: 2020-1-10-203
Section: 7.
Submitted to: MRN.
Batch: Spring2020.
Date of Submission: 10-3-2020.

1. A)
B)
Chart Title
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Total Utility Marginal Utility
C) The law of diminishing marginal utility begins to operate after the 2nd product.
2. In economics, average total cost (ATC) equals total fixed and variable costs divided by total units
produced. Average total cost curve is typically U-shaped because it decreases, bottoms out and then
rises. For example,
It is evident from the graph above that the average total cost curve initially falls, bottoms out and then
rises. It falls because as the output increase, the fixed cost is spread over more and more units. But
the effect of this reduction progressively fades away because the marginal unit results in smaller and
smaller reduction in average fixed cost. ATC ultimately starts climbing when the average variable
cost curve starts to slope up. In fact, the average total cost curve is the vertical summation of average
variable cost curve and average fixed cost curve.
As long as the marginal cost is lower than the average cost, the total average cost keeps falling for
each quantity produced. The moment the marginal cost is higher than the average cost, the average
total cost increases for each quantity produced. That’s why the ATC and MC intersects at the ATC’s
lowest point which can be seen in the graph above.
3. Diminishing marginal returns are an effect of increasing input in the short run while at least one
production variable is kept constant, such as labor or capital. Returns to scale are an effect of
increasing input in all variables of production in the long run. The law of diminishing marginal returns
states that with every additional unit in one factor of production, while all other factors are held
constant, the incremental output per unit will decrease at some point. On the other hand, returns to
scale refers to the proportion between the increase in total input and the resulting increase in output.
There are three kinds of returns to scale: constant returns to scale (CRS), increasing returns to scale
(IRS), and decreasing returns to scale (DRS).
Every company or firm wants to grow bigger despite knowing the Law of diminishing returns. They
know that if they grow their companies or firms they will have some advantages at first because of
the IRS (Division of Labor). They also know that after some time they are going to start facing the
DRS or The Law of Diminishing Returns. But it doesn’t matter to them. They just want to experience
the advantages. That’s why the firms usually want to grow bigger.
4.A)
B)
C)
5. In the short run, some inputs are fixed while the others are variable. On the other hand, in the long run,
the firm can vary all of its inputs. Long run cost is the minimal cost of producing any given level of output
when all individual factors are variable. The long run cost curve helps us understand the functional
relationship between out and the long run cost of production. To understand the derivation of a long run
average cost curve, let’s consider three short run average cost curves (SACs) as shown in figure below:
These SACs are also called plant curves. In the short run, a firm can operate on any SAC, given the
size of the plant. For the sake of our understanding, let’s assume that there are only three plants that
are technically possible. Therefore, the firm increases or decreases its outputs by changing the
amount of the variable inputs.
However, in the long run, the firm examines each SAC to find the curve that allows it to produce a
given level of output at the minimum cost. Hence, it chooses between SAC1, SAC2, and SAC3. From
Fig. 1 above, you can see that to generate OB amount of output, the firm can choose between
SAC1 and SAC2. Note that the firm will choose SAC1 due to the lower costs as compared to SAC2.
As we can see, any firm can easily choose what they want by taking a look at the long-run curves
because it also contains the short-run curves. When they choose a plant, it immediately becomes a
short-run project. That’s why the long-run average cost curve is also called the ‘’Planning Curve’’.

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Assignment 2

Course Title: ECO101.

Name: Rashik Ahmed.

Submitted to: MRN.

Date of Submission: 10-3-2020.

Total Utility Marginal Utility

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