Learning Outcomes:
1. Describe the production possibilities frontier and relate its importance to utilizing firms' economic resources efficiently.
2. Analyze and coordinate the activities of a firm by using the theory of the firm.
3. Employ the costs, output concepts and revenue curves and their relationships in order to maximize the economic profits of firms.
4. Use the characteristics of market structures to formulate market economic activities of the firm.
Question 1: Answer the following questions:
A. Why is the production possibility frontier bowed outwards? Give an example.
B. If the production possibility frontier was a straight line, then there is still tradeoff, what will happen to the value of opportunity cost as we produce more of one good?
Question 2: The firm faces three constraints that limit the amount of profits it can make. Explain these constraints?
Question 3: Answer the following questions:
A. Why is the demand curve facing each firm in a perfectly competitive market horizontal?
B. Explain the two kinds of barriers to entry that exist in a monopoly.
Question 4: Salem has a firm with the following short-run production function. The total fixed cost of the firm is AED 1,500. The firm pays a wage rate of AED 300 per day for each worker. The firm's only variable cost is the wages it pays to workers. Calculate the following:
|
Number of Workers
|
Total Output (Product) (per day)
|
|
0
|
0
|
|
1
|
30
|
|
2
|
55
|
|
3
|
75
|
|
4
|
90
|
|
5
|
100
|
A. The average fixed cost (AFC) when the total output is 75 units.
B. The average variable cost (AVC) when the total output is 75 units.
C. The average total cost (ATC) when the total output is 75 units.
D. The marginal product (MP) of the fourth worker.
Question 5: The following is information about the number of workers employed by a firm and total output produced along with the wage of AED 600 for each worker. In addition, each unit of output is sold at a price of AED 10. You have to answer the following questions:
A. Fill in the empty cells in the table.
|
Number of workers
|
Total Output
|
Marginal Product of Labor (MPL)
|
Value of Marginal Product of Labor VMPL = P x MPL
|
Wage per Worker W
|
Profit Margin (PM)PM=VMPL-Wage
|
|
0
|
0
|
-
|
-
|
-
|
-
|
|
1
|
120
|
|
|
600
|
|
|
2
|
220
|
|
|
600
|
|
|
3
|
300
|
|
|
600
|
|
|
4
|
360
|
|
|
600
|
|
|
5
|
400
|
|
|
600
|
|
|
6
|
420
|
|
|
600
|
|
B. State the condition that the firm should meet to maximize his profit.
C. How many workers should this firm employ to maximize his profits?
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