PUNAY, HERRIMAE M BSBA FM 2-4

Exercise 6

1. Assume that data in the accompanying table give an indifference curve for Amrey. Graph
this curve, putting A on the vertical axis and B on the horizontal axis. Assuming that
prices of A and B are 1.50 and 1.00 peso, respectively, and that Amrey has 24 pesos to
spend, add his budget line to your graph. What combination of A and B will Amrey
purchase? Does your answer meet the MRS=MRMS for equilibrium? 
 
 
Combination Units of A Units of B
 
A 16 6
B 12 8
C 8 12
D 4 24
Indifference Curve
18
16
16 The
14
12 consumer
12 obtains more
Quantity of A

10
8 of product B,
8 increasing
6
4 his or her
4 total utility.
2 But because
0
5 10 15 20 25 total utility is
Quantity of B the same
everywhere
on the curve,
the consumer must give up some of the other product, A, to reduce total utility by a
precisely offsetting amount. Thus, more of B necessitates less of A, and the
quantities of A and B are inversely related.
P b $ 1.00 2
= =
P a $ 1.50 3
 2 units of A must be given up obtaining 3 more units of B
 Combination C Amrey will purchase
 MRS=MRMS

Column 1 Column 2 Column 3 Column 4 Column 5

 Number of
Units of A MU Units of B MU Units of C MU Units of D MU MU
Peso saved

1 72 1 24 1 15 1 36 1 5

2 54 2 15 2 12 2 30 2 4

3 45 3 12 3 8 3 24 3 3

4 36 4 9 4 7 4 18 4 2

5 27 5 7 5 5 5 13 5 1

6 18 6 5 6 4 6 7 6 ½
7 15 7 2 7 3½ 7 4 7 ¼
8 12 8 1 8 3 8 2 8 1/8

2. Columns 1 through 4 in the table show the marginal utility, measured in utils, that
Melcah would get by purchasing various amounts of products A, B, C, and D. Column 5
shows that marginal utility Melcah gets from saving. Assume that prices of A, B, C, and
D, are P18, P6, P4, and P24, respectively, and that Melcah has an income of P106.

a) How many quantities of A, B, C, and D will Melcah purchase in maximizing her

utility?

MarginalUtility x
=Marginal Utility per dollar* A = 4 units
Pricex
* B = 3 units
* C = 3 units
* D = 0 unit

b) How many pesos will Melcah choose to save? How many utils will be her maximum
utility?

- Melcah will choose to save 4 pesos

- She will have 307 utils
- A = 207 utils, B = 51 utils, C = 35 utils , S = 14 utils

c) Check your answers by substituting them into the algebraic statement of the utility –
maximizing rule
 MU of A MU of B MU of C MU of S
= = =
Price of A Price of B Priceof C Price of S
MU of A MU of B MU of C MU of S
= = =
Price of A Price of B Priceof C Price of S

36 12 8 2
= = =
18 6 24 1
2=2=2=2

3. Graph the following completely: (Good A in X axis and Good B in Y axis)

a. Draw an indifference
Perfectly Substitute Goods curve of perfectly
substitute goods
20

15
Good B

10

0
0 2 4 6 8 10 12 14 16
Good A

b. Draw an
Perfectly Complementary Goods indifference curve
of complementary
30
goods
25
20
Good B

15
10
5
0
0 5 10 15 20 25 30
Good A
c. Draw an indifference map with 4 levels of utilities
Draw the shifting of the original budget line using the situations given from d to i)
d. Real income of the consumer increased

e. Real income of the consumer decreased

f. Price of both goods increased

g. Price of both goods decreased

h. Price of Good A increase but price of Good B is constant

 i. Price of Good A increase and price of Good B decrease

Exercise 7
1. Complete the following table:

Inputs of Labor Total Product (TP) Marginal Product (MP) Average Product (AP)
0 0 0 0
1 15 15 15
2 34 19 17
3 51 17 17
4 65 14 16.25
5 74 9 14.8
6 80 6 13.33
7 83 3 11.86
8 82 -1 10.25

a. Plot the total product, marginal product and average products and explain in
detail the relationship between each pair of curves. Explain why MP first
rises, then declines, and ultimately becomes negative.
 Inputs of Labor Total Product (TP) Marginal Product (MP) Average Product (AP)
0 0 - -
1 15 15-0 = 15 15
2 34 34-15 = 19 17
3 51 51-34 = 17 17
4 65 65-51 = 14 16.25
5 74 74-65 = 9 14.8
6 80 80-74 = 6 13.33
7 83 83-80 = 3 11.86
8 82 82-83 = -1 10.25

The first 2 units of labor reflect increasing marginal returns, with marginal products of
15 and 19. But beginning with the third unit of labor, marginal product diminishes
continuously, becoming 3 with the seventh unit of labor and – 1 with the eighth. Average
product, or output per labor unit, is shown in column 4. It is calculated by dividing total
product (column 2) by the number of labor units needed to produce it (column 1). At 3
units of labor, for example, AP is 17 (= 51/3).
The total product, TP, goes through three phases: It rises initially at an increasing rate;
then it increases, but at a diminishing rate; finally, after reaching a maximum, it declines.
Geometrically, marginal product – shown by the MP curve – is the slope of the total-
product curve. Marginal product measures the change in total product associated with
each succeeding unit of labor. Thus, the three phases of total product are also reflected in
marginal product. Where total product is increasing at an increasing rate, marginal
product is rising. Here, extra units of labor are adding larger and larger amounts to total
product. Similarly, where total product is increasing but at a decreasing rate, marginal
product is positive but falling. Each additional unit of labor adds less to total product than
did the previous unit. When total product is at a maximum, marginal product is zero.
When total product declines, marginal product becomes negative.
This relationship is a mathematical necessity. If you add a larger number to a total than
the current average of that total, the average must rise. And if you add a smaller number to
a total than the current average of that total, the average must fall. You raise your average
examination grade only when your score on an additional (marginal) examination is
greater than the average of all your past scores. You lower your average when your grade
on an additional exam is below your current average. In our production example, when the
amount an extra worker adds to total product exceeds the average product of all workers
currently employed, average product will rise. Conversely, an extra worker adds to total
product an amount that is less than the current average product, then average product will
decrease.
 2. A firm has Fixed Cost of 60 and Variable Cost as indicated in the table below. Complete
the table.

Total Average Average Average

Variable Total Cost Marginal
Product Fixed Cost Variable Total Cost
A. Graph (TP)
FC, VC andCost
TC.(VC)
Explain the(TC)
behavior or(AFC)
relationship of the
Cost curves. (ATC)
(AVC)
Cost (MC)

0 ₱0 ₱60.00 ₱0 ₱0 ₱0 ₱45.00
1 ₱45 ₱105.00 ₱60.00 ₱45.00 ₱105.00 ₱40.00
2 ₱85 ₱145.00 ₱30.00 ₱42.50 ₱72.50 ₱35.00
3 ₱120 ₱180.00 ₱20.00 ₱40.00 ₱60.00 ₱30.00
4 ₱150 ₱210.00 ₱15.00 ₱37.50 ₱52.50 ₱35.00
5 ₱185 ₱245.00 ₱12.00 ₱37.00 ₱49.00 ₱40.00
6 ₱225 ₱285.00 ₱10.00 ₱37.50 ₱47.50 ₱45.00
7 ₱270 ₱330.00 ₱8.57 ₱38.57 ₱47.14 ₱55.00
8 ₱325 ₱385.00 ₱7.50 ₱40.63 ₱48.13 ₱65.00
9 ₱390 ₱450.00 ₱6.67 ₱43.33 ₱50.00 ₱75.00
10 ₱465 ₱525.00 ₱6.00 ₱46.50 ₱52.50  

Total variable cost (TVC) changes with output. Total fixed cost (TFC) is independent of
the level of output. The total cost (TC) at any output is the vertical sum of the fixed cost
and variable cost at that output.

B. Graph AFC, AVC, ATC and MC. Explain the behavior or relationship of the curves.
 AFC falls as a given amount of fixed costs is apportioned over a larger and larger
output. AVC initially falls because of increasing marginal returns but then rises because of
diminishing marginal returns. Average total cost (ATC) is the vertical sum of average
variable cost (AVC) and average fixed cost (AFC).
Because total variable cost reflects the law of diminishing returns, so must AVC, which
is derived from total variable cost. Because marginal returns increase initially, fewer and
fewer additional variable resources are needed to produce each of the first 4 units of
output. As a result, variable cost per unit declines. AVC hits a minimum with the fifth unit
of output, and beyond that point AVC rises as diminishing returns require more and more
variable resources to produce each additional unit of output.