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Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author note
Course ID

1ECONOMICS ASSIGNMENT
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................3
Question 4........................................................................................................................................5
Question 5........................................................................................................................................6
Question 6........................................................................................................................................7
Question 7........................................................................................................................................8
Question a....................................................................................................................................8
Question b....................................................................................................................................9
Question c..................................................................................................................................10
References list................................................................................................................................11

2ECONOMICS ASSIGNMENT
Question 1
If law does not penalize Pro for dumping waste in the river and if Pro and Brandon
cannot communicate with each other, then Pro operate without filter as it gives higher gains to
Pro compared to situation with filter (120 > 100)
The choice is not socially efficient. For socially efficient outcome to occur, social
marginal cost needs to be matched with marginal social benefit. The Pro factory imposes an
external cost to the fisherman which is not reflected in private decision choice (Baumol &
Blinder, 2015) As the factor does not account the external cost the private cost exceeds social
cost resulting in over production.
Total surplus under private decision
Total surplus=Gains ¿ Pro +Gains ¿ Brandon
¿ $ 120+$ 30
¿ $ 150
Total surplus under social optimum
Total surplus=Gains ¿ Pro +Gains ¿ Brandon
¿ $ 100+$ 80
¿ $ 180
Difference=$ 180−$ 150
¿ $ 30
Private decision yields a lower surplus by $30.

3ECONOMICS ASSIGNMENT
The daily cost to Filter to Pro ($120 - $100) = $20
The daily benefit to Brandon with filter ($80 - $30) = $50
The benefit to Brandon thus exceeds the cost of Filter to Pro.
Question 2
If a villager keeps the savings in bank, then at 11% interest rate, interest income of (100
*0.11) = $11 will be earned by the individual.
The optimal investment decision of buying one-year-old steer occurs at the point where
the villagers are indifferent between interest income and income earned from selling 2-year-old
steer (Sloman & Jones, 2017). This happens corresponding to 4 steers in common. At this price
of steer is $111 which is equivalent to the interest inclusive income of individual villagers.
Therefore, at optimal 4 steers will be sent onto the commons. The total income of the
village will be ($11 * 4) = $44.
Question 3
Tomato is one of the ingredient used in preparing pizzas. The increase in tomato price
means an increase in cost of making pizzas. The suppliers of pizzas now have to pay a higher
cost to purchase tomatoes. The immediate effect on an increase in the ingredient cost is to lower
the supply of pizzas (McKenzie & Lee, 2016) Following a reduction in pizza supply, the supply
curve swings to leftward direction. The shortage of supply in the market increases the price of
pizza while reduces the supplied quantity of pizza.

4ECONOMICS ASSIGNMENT
Figure 1: effect of an increase in tomato price
Hamburgers and pizzas are substitute to each other. A fall in market price of hamburgers
attracts more buyers to eat hamburger. The price of pizzas now seems to be relatively higher.
More and more consumers now tend to substitute pizzas with hamburgers. With increase in
demand of hamburgers the pizza demand declines. The demand curve according shifts inwards
(Friedman, 2017). The lower demand causes a contraction of pizza market with a resulted lower
equilibrium price and quantity.
Figure 2: Effect of a fall in Hamburger price

5ECONOMICS ASSIGNMENT
Question 4
0 0.5 1 1.5 2 2.5 3 3.5
0
2
4
6
8
10
12
Production function
Bag of seeds
Wheat Production (in Kg)
Figure 3: Production function of wheat
The total production function shapes concave downward. That is total production
increases with increase in the bag of seeds but at a decreasing rate.
0 2 4 6 8 10 12
0
5
10
15
20
25
30
35
Total Cost
Quantity of Wheat
Total Cost
Figure 4: Total Cost curve

6ECONOMICS ASSIGNMENT
The total production function shapes concave upward or convex. That is total cost of
producing wheat increases with increase in quantity of wheat at an increasing rate.
Question 5
Total cost of producing four sets of sofas is $275,000
Total cost of producing five sofas is $320,000
The average total cost indicates per unit cost of producing a given output.
Average Total Cost ( ATC )= Total Cost
Unit of output
¿ $ 320,000
5
¿ $ 64,000
Marginal cost is the addition to total cost following a unit change in output (Cowell, 2018)
Therefore, the marginal cost associated with fifth sofa set is obtained as
Marginal Cost=Total cost of five sofas−Total cost of four sofas
¿ $ 320,000−$ 275,000
¿ $ 45,000

7ECONOMICS ASSIGNMENT
Figure 5: Marginal and average cost curve
From the above figure, it is seen that the marginal cost and average total cost curve
intersect each other at point S. This corresponds to the minimum point of average total cost. The
marginal cost crosses average total cost at the minimum point of average total cost. This is due to
the fact that the marginal cost for producing additional output always affects the average total
cost of production (Stoneman, Bartoloni & Baussola, 2018). For this, as long as marginal cost is
below the average total cost, the average total cost continues to fall. The additional cost of
producing additional unit will be lower larger compared to average total cost and then average
total cost starts to rise.
Question 6
In the long run, the free entry or exit mechanism results in a price that equals both the
average and marginal cost of production. A firm always intends to maximize its profit. The profit
maximizing condition of a firm requires marginal revenue to be equal to marginal cost. In a
market with free entry and exit there is a little control of sellers over quantity or price. This
makes marginal revenue equivalent to price. The profit maximization condition thus implies an
equality between price and marginal cost.

8ECONOMICS ASSIGNMENT
Price equals the average total cost to drive profit to only normal profit. In such an
industry, supernormal profit causes new firms to enter the market. The supply in market thus
increase which lowers price. Followed by the lower price profit falls (Cowen & Tabarrok, 2015).
In a market suffering with economic loss, some firms exist the industry. This lowers the supply,
increases prices and recovers loss. Entry or exit continues unless the industry players have only
normal profit.
Figure 6: Long run market with free entry and exit mechanism
Question 7
Question a
Under the situation of economic loss in perfectly competitive market, price still equals
the marginal cost. Price however is lower than average total cost, following which price fails to
cover the total production cost resulting in a loss for firms (Nicholson & Snyder, 2014) Since the
firms still continue production, price must be higher or equal to minimum point of average
variable cost.

9ECONOMICS ASSIGNMENT

10ECONOMICS ASSIGNMENT
Question b
The figure below demonstrates the present situation of market and a typical firm in the
blueberries market.
Figure 7: Condition of market and individual firm under economic loss
Equilibrium in the market as a whole occurs at the point E. Price in the market equals P
and produced quantity is Q*. Corresponding to this price, equilibrium for individual firms occur
at the point e. This is the point where market price equals marginal cost. A typical firm produces
a quantity equals q*. This price however is smaller than average cost resulting in a loss for the
firm.

11ECONOMICS ASSIGNMENT
Question c
Figure 8: Long run condition in blue berries market
If the demand and cost condition remains the same, the loss making some of the loss
making firms decide to exit the industry. With firms leaving the industry, market supply will
contract. Supply curve in the market thus moves inward lowering the equilibrium quantity in the
market to Q1. This however increase market price to P1. At a higher price, economic loss starts to
lower (Baumol & Blinder, 2015) The new equilibrium for firm is at e1. Each firm now produce a
higher quantity of q2. Firms stop to exit the industry at the point where economic loss complete
eliminated and firms are able to earn normal profit.

12ECONOMICS ASSIGNMENT
References list
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson
Education.
Sloman, J., & Jones, E. (2017). Essential Economics for Business. Pearson.
Stoneman, P., Bartoloni, E., & Baussola, M. (2018). The Microeconomics of Product Innovation.
Oxford University Press.