EPT3100 PRINCIPLES OF AGRICULTURAL ECONOMICS

SEM 2 2018/2019

TUTORIAL 3 INTRODUCTION TO PRODUCTION AND RESOURCE USE

Section A:

1. The firm’s main objective is to _________ the production cost and _________
their profit.

a. Minimize; maximize
b. Maximize; minimize
c. Minimize; Minimize
d. Maximize; maximize

2. __________ is the difference between all revenues or receipts of the firm and the
value of all inputs used by the firm, whether paid or not.

a. Accounting profit
b. Economic profit
c. Accounting cost
d. Economic cost

3. Which of the following conditions is under the perfect competition market

i. Perfect substitute
ii. No barriers of entry but have barriers of exit
iii. Infinite buyers and sellers
iv. Perfect information and rational buyers.

a. i, ii, and iii only

b. i, iii, and iv only
c. ii, iii and iv only
d. iii and iv only

4. If a farmer adds one more labor, will corn yields increase? If so, by how much? Or
would more labor cause yields to decline? Which concept is suitable use to explain
these questions?

a. Marginal utility
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 b. Marginal cost of production
c. Marginal physical product
d. Marginal revenue of product

5. Based on the following output schedule, ______ of workers per year will be hired
to produce the optimum output.

Labor (workers per year) Output

0 0

1 3

2 8

3 12

4 14

5 14

6 12

a. 3
b. 4
c. 5
d. 6

6. The following Figure 1 shows that the stage of production in short-run. The APP
curve and MPP curve are represented the average physical production and
marginal production of corn, respectively.

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 Stage 1 Stage II
Stage III

APP

MPP

Which of the following statement is INCORRECT?

a. The rational producer will produce their product in stage II.

b. Marginal physical product less than average physical product decrease if labor
is hired more than 3workers.
c. Total physical product is maximized when 5 labors are hired.
d. The law of diminishing marginal returns does not exist in the stage II.

The following information pertains to a production schedule for paddy. Answer the
question 7 to question 10 based on this production schedule.

Stage of
Labor Paddy MPP APP
Production

4 260 … …

300 60

7. The APP of labor for 260 tonnes of paddy is ____.

a. 60
b. 65
c. 70
d. 80

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8. How many numbers of labor should be employed to produce the paddy in 300
tonnes?

a. 4
b. 5
c. 6
d. 7

9. The MPP of labor from 260 tonnes of paddy to 300 tonnes of paddy is _____.

a. 40
b. 50
c. 60
d. 70

10. The 300 tonnes of paddy is produced in the stage _____.

a. I
b. II
c. III
d. IV

11. Which of the following statements is Not True to explain the marginal cost?

a. Marginal cost refers to the change in the business’s total costs per unit of
change in output.
b. Marginal cost is equal to average cost when the average cost is at minimum.
c. Marginal cost can decrease, constant, or increase.
d. Marginal cost is greater than the average cost when the average cost is
decreasing.

12. In the theory of production, “short run” means

a. both fixed input and variable input can be added easily in that time period.
b. the production only can be produced by a small firm.
c. the fixed and variable inputs are combined to produce the output.
d. the production period is less than one year.

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13. The following table shows that relationship between the output and cost.

Output (unit) Total Cost (RM) Average Cost (Unit)

R 400 20
S 800 16

If the total fixed cost is RM 100, how much of the average variable cost for the
output in S unit?

a. 20
b. 16
c. 15
d. 14

14. The following table shows that the relationship between the output of goods X and
the number of labor used.

Number of Labor 11 12 13 14 15 16

Output X 121 144 169 189 195 200

The laws of diminishing marginal product will start at the point of ____ labors are
employed.

a. 12
b. 13
c. 14
d. 15

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15. The following table shows that output, long-run average cost (LAC), and long-run
marginal cost (LMC).

Quantity LAC (RM) LMC (RM)

1 15.00 15.00

2 14.50 14.00

3 13.00 10.00

4 12.00 -

5 12.50 14.50

6 13.00 15.50

How much of the long-run marginal cost if the firm produces their output in 4
units?

a. RM 8
b. RM 9
c. RM 10
d. RM 12

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Section B:

1. The following graph presents selected cost functions for a typical firm. The dashed lines
are inserted for easy reference to give you the corresponding values on the dollar and
quantity axes. Please answer the following questions based on this graph.

RM MC

ATC
10.00
8.00
7.00 AVC
6.00

4.60
4.35
4.10
4.00

3.00

100 130 145 160 185 200 Quantity

135 150
a. At a price of RM 7, what would be the level of fixed costs that would be covered
by the firm? Show all prices, quantities, and the method of calculation (i.e., what
is the RM amount of the fixed costs that are covered?).

b. What is the level of the break-even price? The shutdown price? The break-
evenquantity? The shutdown quantity?

c. At a price of RM 6 and assuming that the firm is a profit maximize, what would
be the level of fixed costs that would be covered by the firm? What is the total
level of fixed costs for the profit maximizing quantity? Show all prices,
quantities, and the method of calculation (i.e., what is the RM amount of the
fixed costs that are covered?).

d. What would the level of production and profits for this firm be if the price of
product were RM 4 per unit? Do the company still continue operate? Why?

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2. Fill in the missing cells. Assume the firm operates in a perfectly competitive environment
in both the input and output markets. Calculate the profit (loss) when the firm receives
RM 0.40 for the product.

L Q P(L) TFC TVC TC MC ATC AVC AFC

2 40 5 110

65 0.40

80 0.375

90 150

3. The partial table is for a firm operating in a perfectly competitive market. Please
complete the table and answer the following questions based on the answer that you
provide in the table.

Output
Input Usage Q MPP APP TR MR AR
Price

30 160 … 8.0 1200 …

40 2 4.5

Input Price FC TVC TC MC ATC AVC AFC Profit

...

900 -150

In the preceding example, would the profit maximizing level of output be less than 20
units, between 20 and 30 units, between 30 and 40 units, or greater than 40 units? Why?
(hints: You might find it helpful to include a graph of Marginal Value Product)

4. a. Define the law of diminishing marginal returns.

b. Briefly explain the difference between the following terms:

i. Explicit cost and implicit cost;
ii. Short run and long run

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 c. Jacky quit his job as a programmer where he earned RM40,000 a year. He set
up a computer shop using his RM100,000 personal savings that earned interest
of RM3,000 per year. During the year, he made RM55,000 in total revenue and
paid RM6,500 for the costs of equipment, utilities, internet service and office
supplies. Based on the scenario above, calculate Jacky’s

i. Accounting profit;
ii. Economic profit.

5. a. Explain how a firm decides on the profit maximizing quantity of labour to

employ in the following situations:

i. Value of marginal product (VMP) exceeds wages.

ii. Value of marginal product (VMP) is less than wages.
iii.Value of marginal product (VMP) is equal to the wages.

b. Describe any FOUR (4) characteristics of a perfectly competitive market

structure.

c. Explain the difference between ‘price taker’ and ‘price maker’.

d. Using TWO (2) relevant characteristics of a perfectly competitive market

structure, explain why a firm in this structure is a price taker.

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