STUDENT : NOUR ISMAIL

GROUP : C
ID : 192362

Workshop 4
The Supply Decision

1. (a) Complete the following table of costs for a firm. (Note: enter the figures in the MC column
between outputs of 0 and 1, 1 and 2, 2 and 3, etc.)

Output TC (£) AC (£) MC (£)

0 55 –
30
1 85 85
25
2 110 55
20
3 130 43.3
30
4 160 40
50
5 210 42
70
6 280 46.7
90
7 370 52.9
110
8 480 60
130
9 610 67.8
150
10 760 76

(b) How much is total fixed cost at:

(i) an output of 0? 55 Pound
(ii) an output of 6? 55 Pound

(c) How much is average fixed cost at:

(i) an output of 5? 11 Pound
(ii) an output of 10? 5,50 Pound

(d) How much is total variable cost at an output of 5? 155 Pound

(e) How much is average variable cost at an output of 10? 70,50 Pound
2. (a) Referring to the data from question 1, draw the firm’s average and marginal cost curves on
the following diagram. (Remember to plot MC mid-way between the quantity figures.)

(b) Mark on the diagram the output at which diminishing returns set in.

It is the Point X that is marked on the graph

(c) Assume that the firm is a price taker and faces a market price of £60 per unit.

Draw the firm’s AR and MR curves on the above diagram.

(d) How much will the firm produce in order to maximise profit?
5 units where MC=MR

(e) Shade in the amount of profit it makes.

(f) Calculate how much profit this is TR – TC = (5 X 60pound) – (5 X 42pound)

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3. The following is a list of various types of economies of scale:

(i) The firm can benefit from the specialisation and division of labour.
(ii) It can overcome the problem of indivisibilities.
(iii) It can obtain inputs at a lower price.
(iv) Large containers/machines have a greater capacity relative to their surface area.
(v) The firm may be able to obtain finance at lower cost.
(vi) It becomes economical to sell by-products.
(vii) Production can take place in integrated plants.
(viii) Risks can be spread with a larger number of products or plants.

Match each of the following examples for a particular firm to one of these types of economy of scale.

(a) Delivery vans can carry full loads to single destinations. (ii)

(b) It can more easily make a public issue of shares. (v)

(c) It can diversify into other markets. (viii)

(d) Workers spend less time having to train for a wide variety of different tasks,
and less time moving from task to task. (i)

(e) It negotiates bulk discount with a supplier of raw materials. (iii)

(f) It uses large warehouses to store its raw materials and finished goods. (iv)

(g) A clothing manufacturer does a deal to supply a soft toy manufacturer with
offcuts for stuffing toys. (vi)

(h) Conveyor belts transfer the product through several stages of the manufacturing
process. (vii)

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4. Profit equals revenue minus cost. We have looked at costs. We now turn to revenue.
Let us assume that firm S is a price taker.
(a) In other words it faces a (i) horizontal (ii) demand curve.
(Delete as appropriate.)
Let us assume that it faces a market price of £2 per unit for its product.
(b) What is its total revenue from selling:
(i) 5 units? 5 Pound X 2 = 10
(ii) 8 units? 8 Pound X 2 = 16
(c) What shape is its total revenue curve? A straight line out from the origin
(d) What will be its marginal revenue from selling:
(i) the fifth unit? MR = 2
(ii) the eighth unit? MR = 2
(e) What shape is its marginal revenue curve? A horizontal straight line and equal to the
firm demand curve.

5. Now assume that firm T faces a downward-sloping (straight-line) demand curve.

(a) Fill in the columns for TR and MR in the table below. (Note that the figures for MR are
entered between 0 and 1, 1 and 2, 2 and 3, etc.)
The demand curve for the product of firm T
Price (AR) Quantity Total Revenue (TR) Marginal Revenue (MR)
(£) (units) (£) (£)

20 0 0
18
18 1 18
14
16 2 32
10
14 3 42
6
12 4 48
2
10 5 50
-2
8 6 48
-6
6 7 42

(b) What is the price elasticity of demand at P = £10? -1

(c) Over what price range is demand price elastic? Over 10 Pound
(d) Over what price range is demand price inelastic? Under 10 Pound

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6. There are two methods of showing the profit-maximising position for a firm. The first uses total
revenue and total cost curves.

The figure below shows the total cost and revenue curves for a firm on the same diagram.

(a) At what output is the firm’s profit maximised? 40

(b) How much profit is made at this output? 7 Pound

(c) Draw the total profit TΠ curve over the range of output where positive profit is made.

(d) How much is total fixed cost? 10 Pound

(e) At what output is the price elasticity of demand equal to −1? 5

(f) At what outputs does the firm break even? 21 and 56

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7. The second method of showing the profit-maximising position is to use AR, MR, AC and MC
curves. The following table gives a firm’s average and marginal cost and revenue schedules for
the production of good X.
Costs and revenues for the production of good X
Quantity Average Marginal Average Marginal
(units) Cost (£) Cost (£) Revenue (£) Revenue (£)

100 4.80 1.40 3.20

3.20
200 3.60 0.80 3.20
3.20
300 2.90 0.85 3.20
3.20
400 2.45 1.30 3.20
3.20
500 2.30 2.30 3.20
3.20
600 2.55 4.00 3.20
3.20
700 3.05 6.30 3.20

(a) Draw the AC, MC, AR and MR curves on the above diagram.
(b) Explain the shape of the AR curve The firm is a price taker it has to accept the price as given
by the market
(c) At what output is profit maximised? 560 unit
(d) How much is average cost at this output? 2,40 Pound
(e) How much is average profit at this output? 3,20 – 2,40 =
0,80
(f) Shade in the area representing maximum total profit in the above diagram.
(g) How much is the maximum total profit? 560 X 0,80=
48,00 Pound
(h) What is the lowest price the firm could receive if it were not to make a loss? ............................

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8. A fundamental criticism of the traditional theory of the firm is that the decision makers in the
firm may not even aim to maximise profits in the first place.
On which ONE of the following is this criticism based?
A. Many shareholders do not want to maximise profits
B. Owners of firms are not ‘rational’
C. Shareholders are not the decision makers and have different interests from them
D. Managers prefer to maximise profits because this is usually in their own interest
E. Shareholders are really utility maximisers

9. The problem of managers not pursing the same goals as shareholders is an example of the
principal–agent problem. Because of asymmetric information and different goals, agents may
not always carry out the wishes of their principals.
(a) Asymmetric information refers to the fact that either principals or agents have superior
knowledge and can, therefore, act against the interests of the other party. Normally the party
with superior knowledge is the principal / agent. [Delete one]

In the following cases, which are the principals and which are the agents?

(b) Estate agents and house buyers:

estate agents ............................................. house buyers........................................ ..

(c) Shareholders and managers:

shareholders ............................................. managers ............................................. ..

(d) House builders and architects:

house builders .......................................... architects ...............................................

(e) Employers and workers:

employers ................................................. workers..................................................

(f) Shops and their customers:

shops ........................................................ customers ..............................................

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10. The traditional theory of the firm assumes that firms are short-run profit maximisers. An
alternative assumption is that firms seek to maximise long-run profits.
In what way might each of the following lead to smaller short-run profits but larger long-run
profits?
(a) A large-scale advertising campaign. .........................................................................................
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(b) Opening up a new production line. ...........................................................................................
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(c) Investing in research and development. ...................................................................................
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(d) Launching a takeover bid for a rival company. ........................................................................
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(e) Installing expensive filter equipment to reduce atmospheric pollution from the factory’s
chimneys.
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