Answer to Question #126277 in Microeconomics for 727272982

Question

I. Explain graphically how indifference curve analysis can be used to derive a demand curve?
II. If firms in a competitive industry incur an economic profit, what happens to supply, price, output, and economic profit in the long run? Explain
III. What is the relationship between the marginal revenue curve and the demand curve for a single-price monopolist?
IV. Explain the Law of diminishing return and why is it applicable especially in agriculture sector?

Answer 1

the demand curve slope downward to the right, because as the price of a good falls both the substitution effect and income effect pull together in increasing the quantity demanded of the good.

From the above diagram, the demand curve DD is derived from the indifference curve in the top panel whereby, the X-axis shows the quantity demanded as in indifference curve and Y-axis is the price per unit of good X. In order to obtain the demand curve, various points K, L, S and T representing the demand schedule are plotted. By joining the points K, L, Sand T we get the required demand curve DD.

2.New firms are likely to enter the market due to economic profit in the long run.This profit makes the firm to reduce the quantity it supplies, price falls and the firm reduces its output

3.Marginal revenue will always be less than demand for a given quantity since,a monopolist's demand curve is the same as its average revenue curve and for a monopolist both average and marginal revenue will decrease as quantity increases

4.The law of diminishing returns refers to the extra returns obtained by employing one more unit of variable input which decreases as a firm keeps on increasing the variable input without increasing the fixed input.The law is applied in agriculture because land is a fixed input in the short run.