Answer to Question #240888 in Management for Kwanda

Question

1.1 Discuss the relationship between the three short-run total cost curves. Use a

diagram to motivate your answer. (15)

1.2 Explain the three categories of returns to scale relating to the long-run average

cost curve. 

2.1 Illustrate and examine how the individual supply of labor curve demonstrates the

way an individual divides his/her time between work and leisure. (13)

2.2 Distinguish between income elasticity of demand and cross price elasticity of

demand. Include in your answer a provision of their formula.

3.1 Explain the three possible profit maximizing positions of perfectly competitive

firms in the short-run. (15)

3.2 Describe the nature of the goods produced by a monopolistically competitive

firm. (10)

QUESTION FOUR [20]

4.1 Distinguish between the short-run aggregate supply curve and the long-run

aggregate supply curve. (14)

4.2 Discuss one (1) reason for the downward sloping aggregate demand curve.

Answer 1

1.1

The three short run cost curves are the average total cost, the average fixed cost an average variable cost. The relationship is anchored on the fact that all of them are derived from the the total cost function. how the average total cost curve behaves is all dependent on the average variable cost curve and the average fixed cost curve.

1.2

i.   Constant returns to scale are where there is an increase in the amount of inputs that result to a subsequent increase in the output.

ii.   Increasing returns to scale occurs where output increases more than the proportion of the inputs.

iii.   Decreasing returns to scale is exhibited where the variables in production are raised by specific results in less proportion to increase in the output

2.1

Labour supply of individuals paints the number of hours an individual are able and willing to work at various rates of wage. The labour supply curve shows the trade-off that exists between labour and leisure at any given rate of wage. As the wage rates of individuals increase they tend to supply more labour as work is more attractive that now leisure. This is converse when the wage rates decreases below the desired level. In this case the individuals tend to prefer leisure work than the work itself. 

2.2

Income elasticity of demand measures how demand responds to a change in income  while cross elasticity of demand measures the responsiveness in the quantity demanded of one good when the price changes for another good.

Cross elasticity of demand = $\frac{\Delta Q_{x}}{\Delta P_{Y}} \times \frac{P_{Y}}{Q_{x}}$

Income elasticity of demand = $\frac{percentage in Q_{d} }{Percentage change in income}$

3.1

In short run, a firm maximizes its profit by choosing an output at which marginal cost is equal to marginal revenue.

In short run, a firm maximizes its profit when price is greater than average total cost, the firm is making a profit.

In short run, a firm maximizes its profit when price is equal to marginal cost.

3.2

In Monopolistic competition, firms produce differentiated products, therefore, they are not price takers. The goods have inelastic demand.

4.1

The long-run aggregate supply curve is a vertical line at the potential level of output while the short-run aggregate supply curve is an upward-sloping curve.

4.2

a decrease in the price of goods and services induces the consumers to spend more money , this leads to subsequent increase in the aggregate demand.