Mr Kamarakeh

Topics: Economics of production, Costs, Decision making Pages: 6 (1326 words) Published: April 27, 2013
Assignment A
Q.1. what are indifference curves?
Answer: an indifference curve shows the ordering of preferences by a consumer i.e. it indicates the combination of two products between which the consumer is indifferent, or combination which will yield the same level of satisfaction.

Explain the consumers’ equilibrium under the assumptions of ordinal approach.

Answer: The consumer is in equilibrium when he maximizes his utility, given his income and the market prices. Two conditions must be fulfilled for the consumer to be in equilibrium. The first condition is that the marginal rate of substitution be equal to the ratio of commodity prices. This is necessary but not sufficient condition.

MU x P x
MRS x, y =  
MU y P y

The second condition is that the indifference curve be convex to the origin. This condition is fulfilled by the axiom of diminishing marginal rate of substitution of x for y and vice versa.

Q.2. Examine the concept and relationship of Total, Average and marginal costs with the help of suitable diagram. Answer: Total cost is the total expenditure incurred on the production. It connotes both explicit and implicit money expenditure and includes fixed and variable costs. C = f͂ X,T,Pf, K͂

Where C = Total Cost
X = Output
T = Technology
Pf = Prices of Factors
K = Fixed Factor
Total Cost Curves

Average cost is obtained by dividing the total cost by the total output
AC =

Average cost further can be categorized as average fixed cost (AFC) and average variable cost (AVC)



Average cost curves

Marginal Cost
Marginal cost is the change in the total cost for extra unit of output

Marginal Cost

Q.3. Differentiate and elaborate the concepts of returns to scale and law of variable proportions. Answer:
Laws of Returns to Scale
In the long run expansion of output may be achieved by varying all factors by the same proportion or by different proportions. The laws of returns to scale refer to the effects of scale relationship. Three types of returns to scale are observed. * Constant returns to scale

* Increasing returns to scale
* Decreasing returns to scale

Constant returns to scale
If the quantity of all inputs used in the production is increased by a given proportion and we have output increased in the same proportion; it is termed as constant returns to scale

Increasing returns to scale
If output increases by a greater proportion in comparison to a change in the scale of inputs it is termed as increasing Returns to Scale. The causes of increasing returns to scale are: * Specialization of labor

* Inventory Economies
* Managerial indivisibilities
* Technical indivisibilities

Diminishing Returns to Scale
If output increases by a smaller proportion in comparison to the change in the scale of inputs, it is described as diminishing returns to scale. The reasons of diminishing returns to scale are: * Managerial inefficiency

* Exhaustible natural resources
* Increased bureaucratic
* Labor inefficiency
* Pressure on inputs market due to increasing demand
* Pressure on inputs prices due to bulk purchase
However this differs from the law of variable proportions in that in this one if one of the factors of production are (usually capital K) is fixed after a certain range of production additional output (i.e. marginal product) starts to diminish. It is also known as the law of diminishing returns. The range of output over which the marginal products of the factors are positive but diminishing is considered as equilibrium range of output. The range of increasing returns to a factor...
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