Defense University,

College of Health Science

Introduction to Economics (Econ 2010)
Group Assignment (15 %)

1. Given the short-run production function with two inputs and one output Q=f ( L, ) ;
a. Sketch the total, average and marginal product curves.
b. Using the curves in “a” discuss the stages of production and their implications.
2. Given the short-run cost function of a firm C=f (Q);
a. Sketch the total fixed cost, total variable cost, total cost, average fixed cost, average variable cost,
average total cost and marginal cost curves of the firm.
b. Discuss the behavior of each curve in “a”.
3. Using curves, discuss the relationships between the following pair of short-run product and cost functions of
a firm.
a. Total product & total variable cost.
b. Average product & Average variable cost.
c. Marginal product & marginal variable cost.
4. Suppose you want to start a firm that produces T-shirts, and you want to calculate your profit over the year.
Your book keeper provides you with the following information:

Cost of raw materials 80,000 Birr

Wages and salaries 150,000 Birr

Electricity and phone 20,000 Birr

Advertising cost 40,000 Birr
Annual production of T-shirts 3,000 Birr
Market price of T-shirts 100 Birr/unit

Suppose also that in order to start your business you are thinking of using your own 100,000 Birr- money that
could have been earning 5,000 Birr/year in interest if you would put it in a bank instead; two extra rooms in your
house as a factory-rooms that could have been rented out for 2,000 Birr/month. Finally, you are planning to
manage the firm full time, by quitting your current job with a yearly salary of 40,000 Birr.

a. Calculate implicit cost and explicit /accounting cost of the firm.

b. Calculate economic profit and accounting profit of the firm.
c. Which one of them, economic or accounting profit, is a better guide for resource allocation? Why?
5. Consider the following short-run cost and revenue schedule of a firm.

Q TFC TV TC AFC AVC AT MC P TR AR MR π Mπ

C C
0 3
1 2
2 4
3 3
4 6
5 23
6 5

a. Complete the table with appropriate figures.

b. What is the firm’s equilibrium output?
6. If the short-run production function of a firm is given by:Q=60 L2−4 L3 ;
a. Determine the APL and MPL functions of the firm.
b. Find the labor employment level at which the law of marginal returns starts to operate.
c. Find the labor employment level that maximizes total product.
d. Determine the ranges of labor employment that define the 3 stages of production.
7. If a perfectly competitive firm’s cost & revenue conditions are given as follows:
C=1200+16 q−6 q 2+ q3
Market demand:Q d =191−3.5 P ; C . P .
Market supply: Qs =127+0.5 P ; C . P .

a. Determine the optimal level of output of the firm.

b. Find the maxim profit or loss.
c. Should the firm continue production or shutdown? Why?