Individual Report

Submitted to:
Professor Dr. K.M. Zahidul Islam
School of Business and Economics
North South University

Submitted by:
Ibrahim Khalil
ID: 1915216660

Managerial Economics
BUS-525 (Section 4)

Date of Submission:
26th September, 2020
Answer To the Question No. 1

To fill a vacant position, we should be concerned with the marginal product of the last worker
hired, because the marginal product measures the effect on output, or total product, of hiring
another worker. This in turn determines the additional revenue generated by hiring another worker,
which should then be compared to the cost of hiring the additional worker. The point at which the
average product begins to decline is the point where average product is equal to marginal product.
As more workers are used beyond this point, both average product and marginal product decline.
However, marginal product is still positive, so total product continues to increase. Subsequently,
it may still be profitable to hire another worker.

When MPL>APL, then labor elasticity is EL>1. So with 1 percent increase in labor will increase
the output by more than 1 percent.
MPL<APL, labor Elasticity is EL<1, so by 1 percent increase in labor will increase the output by
less than 1 percent.

The elasticity of the labor would be [EL= MPL/APL]:

Number of workers Output APL MPL EL

2 3 1.5 - -
3 6 2 3 1.5
4 11 2.75 5 1.81818
5 19 3.8 8 2.10526
6 24 4 5 1.25
7 28 4 4 1
8 31 3.875 3 0.77419
9 33 3.66667 2 0.54545
10 34 3.4 1 0.29412
11 34 3.09091 0 0
12 33 2.75 -1 -0.3636

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The law of the diminishing return state that as the number of inputs increases the output reach a
certain points from which the output is starts to decreases.
Graph: (a)

Output(Q)
40

35

30

25

20

15

10

0
2 3 4 5 6 7 8 9 10 11 12

Labor (L)
Graph: (b)

9.0

8.0

7.0

6.0

5.0

4.0

3.0
Average Product
2.0

1.0

0.0
2 3 4 5 6 7 8 9 10 11 12
-1.0 Marginal Product
-2.0

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So if we look at above graph (a) we can see that, with the increase of 1 labor after the 11 the output
has dropped from 34 to 33. That is at point 11 the optimum level of production will produce after
that for 1 unit of labor the output will start to decline.

Now if we compare the both the graph we can find a relation between law of diminishing marginal
return with the 3 stages of the product output. So, by keeping the labor constant we found that
relation between the product and the law of diminishing return in graph (b).

Stage 1: When the labor input is increase from 0 to 7 we get maximum average product which is
4. This is point where the marginal product and the average product are equal and firms optimum
level of production.

Stage 2: Now with the increase of each labor we will see that the marginal product is start to
decline. So the point at which the marginal product become 0 is the second stage. In the above
graph (b) we see that for the labor of 11 the marginal product curve become zero.

Stage 3: The point from which the marginal curve starts to become negative. After increase of 1
labor from 11 we see that the additional labor makes the marginal product negative.

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Answer To the Question No. 2

a) At present, the loss is Taka 60 Million and fixed cost is Taka 70 million. It means that the firm
is getting income that is more than the variable cost.
Gross profit = 70-60 = Taka 10 million.
It implies that some portion of fixed cost is being recovered and price is over the AVC. It implies
that firm is working over the closure point. In this way, firm ought to stay operational in the short
run.
Thus, president is correct that plant should proceed with its tasks. CEO is mistaken, saying that
fixed cost isn't considered in profit estimation. Here, genuine profit is determined after thought of
fixed cost moreover. For example,
Net profit = Total revenue - total variable cost - fixed cost
Nonetheless, fixed cost are treated as sunk cost and doesn't influence the future choices. On this
premise additionally, firm’s income is more than the variable cost.

b) An expanding cost industry means, an increase in since quite a while ago run ATC and ATC
curve shifts towards the upward heading, making firm to accomplish more significant level of
production because of increment in minimum efficient yield level. Subsequently, it is normal that
cost of production of the firm over the long haul will increment, as request builds a new firms go
to the business. It will cause, cost of production for the firm to increment. Subsequently, price will
likewise increment and also profit will likewise increment to the level to accomplish zero
economic profit over the long run.

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Answer To the Question No. 3

Average Total Cost = Average Fixed Cost + Average Variable Cost. When graphed, the difference
between the U-shaped total cost and average variable cost curves is the average fixed cost curve.
If fixed cost is greater than zero, the minimum of average variable cost must be less than the
minimum average total cost. Moreover, since average fixed cost continues to fall as more output
is produced, average total cost will continue to fall even after average variable cost has reached its
minimum because the drop in average fixed cost exceeds the increase in the average variable cost.
Also, the fall in average fixed cost becomes small enough so that the rise in average variable cost
causes average total cost to begin to rise.

We can also describe as like that, both the Average total cost and average variable cost curves are
‘U’ shaped. Producer faces downward sloping Average total and average fixed cost curves as
output increases. The average variable cost curve reaches its lower level, then increases and the
total cost curve continues to fall. This happens because the falling average fixed cost offsets the
increase in the average variable cost.

TIME OUTPUT CAPITAL LABOR ln Q ln K ln L

(Q) (K) (L)
1 225 12 20 5.416100402 2.48490665 2.995732274
2 240 14 22 5.480638923 2.63905733 3.091042453
3 278 10 24 5.627621114 2.302585093 3.17805383
4 212 14 18 5.356586275 2.63905733 2.890371758
5 199 12 20 5.293304825 2.48490665 2.995732274
6 297 16 24 5.693732139 2.772588722 3.17805383
7 242 16 20 5.488937726 2.772588722 2.995732274
8 155 10 14 5.043425117 2.302585093 2.63905733
9 215 8 20 5.370638028 2.079441542 2.995732274
10 160 8 14 5.075173815 2.079441542 2.63905733

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Regression Analysis: ln Q versus ln K, ln L

Analysis of Variance

Source DF Adj SS Adj MS F-Value P-Value

Regression 2 0.367895 0.183948 43.96 0.000
ln K 1 0.005619 0.005619 1.34 0.284
ln L 1 0.238624 0.238624 57.03 0.000
Error 7 0.029288 0.004184
Lack-of-Fit 6 0.021749 0.003625 0.48 0.801
Pure Error 1 0.007539 0.007539
Total 9 0.397183

Model Summary

S R-sq R-sq(adj) R-sq(pred)

0.0646841 92.63% 90.52% 87.23%

Coefficients

Term Coef SE Coef T-Value P-Value VIF

Constant 2.220 0.338 6.56 0.000
ln K 0.1109 0.0957 1.16 0.284 1.31
ln L 0.977 0.129 7.55 0.000 1.31

Regression Equation

ln Q = 2.220 + 0.1109 ln K + 0.977 ln L

Fits and Diagnostics for Unusual Observations

Obs ln Q Fit Resid Std Resid

5 5.2933 5.4229 -0.1296 -2.12 R

R Large residual

First, we transform the production function by taking the natural logarithm of each term in the
function, that is,
Q  AK  L
ln Q = ln A +  ln K +  ln L

By transforming the output capital and labor into logarithm, the least-square regression method
can be used to estimate the parameters. Using a standard multiple regression computer program
(Minitab), the following results were obtained:

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 ln Q = 2.220 + 0.1109 ln K + 0.977 ln L R2 = 0.93

The estimated parameters are  = 0.1109,  = 0.977 and the value of A is determined by taking
antilogarithm of 2.220, which is 9.21. Thus the estimated production function in its original
function form is,

Q = 9.21K0.1109 L0.977

Return scale are increasing because  +  = 1.0879 is greater than 1. The marginal

MPK =  AK  -1L  = 0.1109(9.21) K-0.889 L0.977

And

MPL =  AK  L  -1 = 0.977 (9.21) K0.1109 L-0.023

Substituting the estimated values for the parameters A,  ,  and the specified values of capital
and labor ( K = 20 and L = 30) yield the following marginal products:

MPK = 0.1109 (9.21) (20)-0.889 (30)0.977 = 1.98

MPL = 0.977 (9.21) (20)0.1109 (30)-0.023 = 11.60

These estimated mean that a one unit change in capital with labor held constant at 30 would
result in a 1.98 unit change in output, and a 1 unit change labor with capital held constant at 20
would be associated with a 11.60 unit change in output.

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Answer To the Question No. 4 (a)

Regression Analysis: Total Cost versus Output

Analysis of Variance

Source DF Adj SS Adj MS F-Value P-Value

Regression 1 1685604 1685604 47.67 0.001
Output 1 1685604 1685604 47.67 0.001
Error 5 176796 35359
Total 6 1862400

Model Summary

S R-sq R-sq(adj) R-sq(pred)

188.041 90.51% 88.61% 76.49%

Coefficients

Term Coef SE Coef T-Value P-Value VIF

Constant 409 159 2.57 0.050
Output 4.907 0.711 6.90 0.001 1.00

Regression Equation

Total Cost = 409 + 4.907 Output

Estimated Regression Equation:

Total Cost (TC) = 409+4.907*Q
ATC = TC/Q = (409/Q)+4.907
MC = dTC/dQ = 4.907
ATC is minimized when dATC/dQ = 0
dATC/dQ = - (409/Q2) = 0
Q2 = 409
Q = 20.22
ATC = (409/ 20.22) + 4.907=20.22 + 4.907 = 25.127
When P = 6, this price is less than ATC, so firm will incur a loss. Therefore, the firm should not
continue its production.

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(b)
OUTPUT FC VC TC ATC AVC MC

0 100 0 100 - - -

1 100 25 125 125 25 25

2 100 45 145 72.5 22.5 20

3 100 57 157 52.3333 19 12

4 100 77 177 44.25 19.25 20

5 100 102 202 40.4 20.4 25

6 100 136 236 39.3333 22.6667 34

7 100 170 270 38.5714 24.2857 56

8 100 226 326 40.75 28.25 72

9 100 298 398 44.2222 33.1111 92

10 100 390 490 49 39 -

When MC is above AVC, it is pushing the average up. So, AVC must be rising. When the
marginal unit cost more than the average cost, the average cost has to increase.
The MC curve intersects the AVC curve at the minimum point on the AVC curve. At the
interaction MC and AVC are equal.

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Answer To the Question No. 5

The managerial implications of the following figure for a perfectly competitive firm:

For the perfectly competitive market in long run, the firm must earn the normal profits. The earning
of normal profits means that the price will be equal to the minimum of ATC curve. In the above
figure, we can see that Price is $17, whereas the minimum of ATC curve lies at price of $10. This
means that the firm is in the supernormal condition in long run. This is not the ideal condition.

So, in order to make the profits normal, the management has to take up the responsibility of
increasing the production and employing more resources so that AC rises and its minimum point
coincides with Price curve.

Also this condition should occur at the point where MR = MC, which is not happening here.

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Answer To the Question No. 6

As Proton merged with Honda both the manufacturing companies are sharing the same production
facility. The partnership deal between the Proton and Honda would reduce the cost of production
in the following ways:

a. Regulation of monopoly: Regardless of whether Honda gains imposing business model

force from an organization, it doesn't need to prompt greater costs on the off chance that it
is adequately managed by the government. For instance, in certain ventures, the
government has cost controls to restrict cost increments. That empowers firms to profit by
economies of scale, however buyers don't confront restraining infrastructure costs.
b. Bigger firms more efficiency: When the association bargain has occurred, this implies a
firm has more labor to create more, this in turn prompts more proficiency in the creation
cycle by bringing down the cost of production.
c. Research and development: In certain enterprises, it is critical to put resources into
innovative work to find new items or innovation. An organization bargain empowers the
firm to be more productive and have more noteworthy assets for innovative work.
d. Economies of scale: The possible economies of scale that can emerge include: (i) Mass
purchasing - purchasing crude materials in mass empowers lower normal expenses. (ii)
Specialized economies - huge machines and venture is more proficient spread over a
bigger yield. (iii) Advertising economies - A small firm purchased may profit by the large
firm ability and brand name.
e. Avoids duplication: It bodes well to haven an organization arrangement to keep away
from duplication. For instance tow transport organizations might be contending over
similar stretch of streets customers could profit by a firm with lower costs. Dodging
duplication would have natural advantage and help lessen blockage.

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Economic of Scale:

This graph shows that as Proton increase output from Q1 to Q2, average costs fall from P1 to P2.
Economies of scale are important in light of the fact that they imply that as firms increase in size,
they can become more efficient. There are many different way how Proton can benefit from
economies of scale-including specialization, bulk purchasing and the utilization of assembly lines.
As Proton increase output from Q1 to Q2, average costs fall from P1 to P2, in terms of pricing,
economics of scale could help Proton to complete with its rival.

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