Economics Exercise – Topic 6.0

1. Define marginal product (MP). Also provide one suitable example to illustrate the concept of MP.

2. The following table shows the total product for a bread factory. Complete the table.

Raw Materials 1 ton 2 t 3 t 4 t 5 t 6 t

Total Product 5000 7000 8500 9500 10000 10000

Marginal Product 5000

3. Based on the answers from Q2, is the factory experiencing the law of increasing or diminishing returns? Why do you say so?

4. Draw the graphs of total product and marginal product (as per the lecture notes), indicating the area where the laws of increasing and diminishing returns are at work.

5. What is the Law of Diminishing Returns? What causes it? Can you provide an example of your own to illustrate this law?

6. What is the Law of Increasing Returns? And what causes it? Elaborate.

7. How is per unit cost of product (say, a sushi roll) derived i.e. what is the formula?

8. What is fixed cost? Provide 2 examples. What happens to average fixed cost (AFC) when total product increases? Explain and show the relevant graph.

9. What is variable cost? Provide 2 examples. Also, what is the formula for average variable cost (AVC)?

10. True or False?

a) If the marginal product is rising, then total product will increase at a faster rate.

b) Fixed cost is constant at every level of output except zero. When a factory produces no output, its fixed cost is also zero.

c) In the short run, if a firm were to keep employing more inputs, then it can increase the total product indefinitely (i.e. forever and ever).