Ilagan, Mhay Justine S.

BSBA FM1 G2

Ma’am Susan Reyes

CHAPTER 5

QUESTIONS FOR DISCUSSION

1. What is utility ? What is the difference between total utility and marginal
ulitity? Explain why utility is subjective for each individual.

 Total utility is the total satisfaction received from consuming a

given total quantity of a good or service, while marginal utility is
the satisfaction gained from consuming an additional quantity of
that item. Total utility measures the aggregate satisfaction an
individual receives from the consumption of a specific quantity of
a good or service, marginal utility is the satisfaction an individual
receives from consuming one additional unit of a good or service.

2. How do we measure utility?

 We can try to measure utility by using a hypothetical unit of

measurement – utils. For example, if you go to a supermarket, you
may feel a bag of apples gives you a moderate utility of 20 utils.
By comparison, a large pizza may give a greater satisfaction of 50
utils.

3. What is indifference curve ? What are the characteristics of indifference

curve?
  An indifference curve is a contour line where utility remains
constant across all points on the line. In economics, an indifference
curve is a line drawn between different consumption bundles, on a
graph charting the quantity of good A consumed versus the
quantity of good B consumed. An indifference curve is a graphical
representation of a combined products that gives similar kind of
satisfaction to a consumer thereby making them indifferent. Every
point on the indifference curve shows that an individual or a
consumer is indifferent between the two products as it gives him
the same kind of utility.

4. What is an Engel Curve ? How does an Engel Curve appear for inferior
and luxury goods?

 Amongst normal goods, there are two possibilities. Although the

Engel curve remains upward sloping in both cases, it bends toward
the X-axis for necessities and towards the Y-axis for luxury goods.
For inferior goods, the Engel curve has a negative gradient. Engel
curves relate the quantity of good consumed to income. If the good
is a normal good, the Engel curve is upward sloping. If the good is
an inferior good, the Engel curve is downward sloping.

5. Discuss the difference between income and substitution effects .

 The income effect expresses the impact of increased purchasing

power on consumption, while the substitution effect describes how
consumption is impacted by changing relative income and prices.
The substitution effect of a price increase is the switch to other
goods that have become a relatively good deal. The income effect
of a price increase is the change in consumption that results from
the decrease in the purchasing power of consumers' income.
 CHAPTER TEST

1. Consider the schedule on the right showing the total utility and marginal
utility obtained from eating ham sandwich. Complete the table.

2. Using the data in problem number 1 ,

plot the utility and marginal utility of ham sandwich. Indicate the point of
saturation .
3. Below gives and individual marginal utility (MU) schedule for both good
X and Y . Consider X and Y as the only available goods in the market.
The price of Good X is 3 pesos , the price of Good Y is 2 pesos and the
individual’s income is 30

A. Show how the individual spends his income to maximize his utility.
B. State mathematically the equilibrium condition for the consumer

4. Compute the marginal rate of substitution (MRS) of each indifference

curve in the table. Fill your answer on the space provided.
5. Using problem number 4 , plot the three indifference curves.

6. From the given

table , compute for the marginal utility of good X (MUx) . Also plot Tux
and Mux schedule and indicate the saturation point .

7. The following tables gives points on four different indifference

curves for a particular consumer.
A. Plot indifference curves I , II , lll and IV on the same set of axes .

B. What do the indifference curves indicate?

 An indifference curve shows a combination of two goods in

various quantities that provides equal satisfaction (utility) to an
individual. 

C. Compute for the marginal rate of substitution (MRS) on all indifference

curves.

D. If the price of Good y is 1 peso per unit while the price of Good X is 2
pesos per unit and assuming that the budget of 5he consumer rises from 12
pesos to 16 pesos and then 20 pesos per time period , all spent on goods x and
Y,

d.1 Derive the income consumption curve

d.2 Find and explain the the Engel Curve

Ilagan, Mhay Justine S.

BSBA FM1 G2

Ma’am Susan Reyes

CHAPTER 6
Questions for Discussion
1. Describe the three stages of production. What stage of production is most
favorable? Explain your answer.

 Stage one is the period of most growth in a company's production.

In this period, each additional variable input will produce more
products. This signifies an increasing marginal return; the
investment on the variable input outweighs the cost of producing
an additional product at an increasing rate. Stage two is the period
where marginal returns start to decrease. Each additional variable
input will still produce additional units but at a decreasing rate.
This is because of the law of diminishing returns: Output steadily
decreases on each additional unit of variable input, holding all
other inputs fixed. In stage three, marginal returns start to turn
negative. Adding more variable inputs becomes counterproductive;
an additional source of labor will lessen overall production.

2. Explain the relationship between marginal product (MP) and average

product (AP).

 When Average Product is rising, Marginal Product lies above

Average Product. When Average Product is declining, Marginal
Product lies below Average Product. At the maximum of Average
Product, Marginal and Average Product equal each other.

3. Explain the difference between short-run and long -run analysis of

production. Cite an example.

 The main difference between long run and short run costs is
that there are no fixed factors in the long run; there are both fixed
and variable factors in the short run. In the long run the general
price level, contractual wages, and expectations adjust fully to the
state of the economy.

4. Explain the law of diminishing marginal returns and give numerical

example.

 Diminishing Marginal Returns occur when increasing one unit of

production, whilst holding other factors constant – results in lower
 levels of output. In other words, production starts to become less
efficient. For example, a worker may produce 100 units per hour
for 40 hours.

5. Using the following table, what is the marginal product (MP) of the 5th
unit of labor?

Units of Total Product

Labor
(TP)
(L)

0 0

1 1

2 2

3 3

4 4

5 5

CHAPTER TEST

1. The following is a production schedule of a certain firm. Fill the missing

value for average product (AP) and marginal product (MP).
2. Verify the table in problem number 1, plot the total product (TP),
marginal product (MP), and average product (AP), and determine the
three stages of production. At what stage should one produce? Explain.

3. Using the following table, at what points do diminishing marginal returns

begin? Show your computation.
4. Given the following table for a firm whose price is 16 pesos per unit of
quantity sold, what is the marginal product of 3rd unit of labor?

5. The information illustrated between A and B on the above marginal

product (MP) curve is equivalent to which pair of points on the following
total product (TP) curve below? Briefly explain your answer.

 In the information illustrated between A and B decrease as well as

MP so that the pair of points on the following total product TP
curve below are point X-Z

6.

A. isoquants I,
Il, Ill, and
IV on the
same set
of axes.

B. What do
the
isoquants
indicate?
  The term "isoquant," broken down in Latin, means “equal
quantity,” with “iso” meaning equal and “quant” meaning quantity.
Essentially, the curve represents a consistent amount of output. The
isoquant is known, alternatively, as an equal product curve or a
production indifference curve.

C. Compute for the marginal rate of technical substitution (MRTS) on all

isoquants.

D. If the price of capital (Pk) is 1 peso per unit while the price of labor (PL.)
is 2 pesos per unit and assuming that the total outlay of the producer rises
from 12 pesos to 16 pesos and then 20 pesos per time period, determine
the expansion path.

KEYTERMS – CHAPTER 5

 Budget Line - Budget line is a graphical representation of all possible

combinations of two goods which can be purchased with given income and
prices, such that the cost of each of these combinations is equal to the money
income of the consumer.

 Cardinal Ranking of Preference - An ordinal utility function is a function

representing the preferences of an agent on an ordinal scale.

 Engel Curve - The Engel curve describes how the spending on a certain good
varies with household income by either proportion or absolute dollar amount.
 Income Consumption Curve - Income Consumption Curve (ICC) is a curve
relating balance point caused by income change of consumers.

 Income Effect - The income effect describes how an increase in income can
change the quantity of goods that consumers will demand.

 Indifference Curve - An indifference curve shows a combination of two

goods in various quantities that provides equal satisfaction (utility) to an
individual.

 Law of Diminishing Marginal Utility - The “Law of Diminishing Marginal

Utility” states that for any good or service, the marginal utility of that good or
service decreases as the quantity of the good increases, ceteris paribus.

 Marginal Rate of Substitution - The marginal rate of substitution (MRS) is

the amount of a good that a consumer is willing to consume compared to
another good, as long as the new good is equally satisfying.

 Marginal Utility - Marginal utility is the added satisfaction a consumer gets

from having one more unit of a good or service.

 Price Consumption Curve - The price-consumption curve indicates the price

effect of a change in the price of X on the consumer’s purchases of the two
goods X and Y, given his income, tastes, preferences and the price of good Y.

 Substitution Effect - The substitution effect is the decrease in sales for a

product that can be attributed to consumers switching to cheaper alternatives
when its price rises.

 Utility - Utility refers to the comprehensive benefits obtained from consuming

an item or service. This sums up the utility definition. Consumers would
typically aim to maximise their utility based on rational choice based on
economic models.

KEYTERMS – CHAPTER 6
 Average Product - The term average product refers to the average
output (or products) produced by each input (factors of production like
labor and land).

 Expansion Path - The expansion path is the locus of different points of

firm's equilibrium when it changes its total outlay to expand output
while relative factor prices remain constant.
 Isocost - An isocost line is a graph showing various possible
combinations of inputs (labor and capital) that can be purchased for an
estimated total cost.

 Isoquant - The term "isoquant," broken down in Latin, means “equal

quantity,” with “iso” meaning equal and “quant” meaning quantity.
Essentially, the curve represents a consistent amount of output. The
isoquant is known, alternatively, as an equal product curve or a
production indifference curve.

 Law of Diminishing Marginal Returns - The law of diminishing

marginal returns states that adding an additional factor of production
results in smaller increases in output.

 Marginal Product - The marginal product(MP) refers to the total output

quantity generated by each extra input unit utilized in production.

 Marginal Rate of Technical Substitution - The marginal rate of

technical substitution (of labor for capital) is the rate at which capital
can be reduced for every one unit increase in labor, and keeping output
constant.

 Output - Any information processed by and sent out from computer or

other electronic device is considered output.

 Production - Production is the process of combining various inputs,

both material (such as metal, wood, glass, or plastics) and immaterial
(such as plans, or knowledge) in order to create output.

 Returns to Scale - Returns to scale is a term that refers to the

proportionality of changes in output after the amounts of all inputs in
production have been changed by the same factor.