1 price

PM MR=AR=P

quantity
QM
In perfect competition, a firm maximizes their profits by producing at
the point where MC = MR

Question 2
a) Budget equation: 10X + 5Y = 40

8 I1= 10X+5Y

6
I2 = 5X+5Y

X
4 6
b) If I spent all income on commodity 1: 10X =40 => X = 4
I could buy 4 units of commodity 1
 c) the amount allowed to spend falls to $30, while the prices of both
commodities remain at $5
The new budget equation is 30 = 5X +5Y

Question 3
A) Vertical axis: Hours studying history (y)
Horizontal axis: Hours studying economics (x)

y hours studying history

hours studying economics

x
Since Ratpack hates both subjects but has strictly convex preferences,
his indifference curve is a sloping downward curve and is negative.
When he spends less time studying economics he will have to raise his
hour studying history to face the same satisfaction levels
b)

Question 4
“The budget constraint for intertemporal consumption can be
expressed in terms of present value or future value”.
This statement is true
The value budget constrain is based on the current value of income and
the future value budget constrain is based on the future value of income
and wealth
The intertemporal budget constraint shows the trade off between today
and future consumption. This consumer‘s decision about this trade off will
lead to their choice about how much to save and borrow
Question 5
If a firm exhibits decreasing returns to scale at all levels of output then
dividing them into two equal-size smaller firms would result in an
increase in profit of each new firm due to the suggestion that when a firm
faces decreasing return-to-scale, it should produce at the level beyond the
optimal size for efficiency
By divided it in two smaller firms, each firm can operate at a more optimal
size and improve their efficiency and profit
Additionally, the competition between two new firms can lead to more
greater profit in long-run
Question 6
a) ‘Average fixed costs never increase with output’ This statement is
true because fixed cost does not change with output

P
cost

AFC
Q
b) Average total costs are always greater than or equal to
average variable costs. This statement is false
ATC is the sum of AFC and AVC. Since AFC can never be zero, AVC
can never be equal or greater than ATC. Thus, ATC always remains
above AVC.

Question 7
A customer buy insurance because of guaranteed protection, income
replacement , tax-free benefit , dividend potential , optional rider