Microeconomics Theory 2022

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................3
Answer 5..........................................................................................................................................4
Answer 6..........................................................................................................................................4
Answer 7..........................................................................................................................................5
Reference.........................................................................................................................................6

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Answer 1
(a) It is important to distinguish between explicit and implicit costs because both gives different
notions and helps to make decision about a venture or business differently (Gould and Blair
2020). Explicit cost is the direct cost of running a business such as wages and raw material cost
and thus it helps in business operation decision. Alternatively, implicit cost is the opportunity
cost of the business such a not using an advanced technology and not producing another product.
(b) Nike spent 1 billion on advertising expenditure- Explicit
Jims Transport spent 5000 of fuel - Explicit
BHP paid interest on company issued bonds - Implicit
Rio Tinto spent 200 million on executive salaries – Explicit
Except interest payment, all are explicit. Interest payment is the cost that BHP is paying for using
funds that it borrowed from market. On the other hand, all other are direct payment under
business operation.
Answer 2
(a) MPL =5=, MC=3. Therefore MPL> MC thus with every unit employment of marginal returns
increases and thus firm makes more product by accruing lower cost. That is average total cost is
decreasing. However, if MPL becomes 2 and MC increases to 4, marginal return will be lower
increase in cost. That is fall in MPL causes marginal returns to fall and marginal cost to rise.

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(b) Initially marginal cost (MC) remains below average total cost (ATC). With rise in marginal
cost ATC falls when MC< ATC and ATC rises when MC> ATC. Profit per unit keeps on
increasing with every extra unit of production when MC<ATC.
Answer 3
(a) Price maker is the one who sets price of products in a market. In monopoly market, sellers are
price maker, buyers are price taker, and buyers have no bargaining power. Thus, buyers have to
take purchase the product at seller’s price as there are no firm available in the market. Therefore,
fall in demand due to price rise is less. Conversely, in monopolistic competitive there are many
sellers and they do not have market power and thus are not price maker (Bykadorov et al. 2016).
Buyers have several purchase options. Thus, in monopoly demand curve is more inelastic.
(b) Zero economic profit is called normal profit. At normal profit, firms only recover the total
cost. Thus, profit below normal profit is actually loss and thus it is necessary to make normal
profit to remain in business in the long run.
(c) Firm is price taker, identical products, no barriers to entry and exit, buyers have complete
knowledge about market and firms have small share of market, these conditions are required for
a perfectly competitive market (Nyborg 2019). However, in real world not all the five conditions
happens together and thus perfect competition is unlikely to exist.
(d) Share market is close to perfect competition due to existence of identical product, no barriers
to entry and exit and sellers have less share in the market.
Answer 4
If the Frank is making revenue over the average variable cost, they he should continue to
operate in the market since by operating he can recover variable cost some of his fixed cost.

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However, if the revenue earned is lower than average variable cost then he should shut down as
he is not recovering any of the cost.
Answer 5
Considering a case of manufacturer in perfectly competitive market
Figure 1: Profit maximizing output
Source: (Created by the Author)
Profit is maximized where MC=MR. When MR>MC revenue increases more than the
cost hence more profit (Ibrahim 2019). Alternatively, MR< MC revenue increases less than cost
hence less profit. Thus, MR=MC gives profit maximizing output Q* shown in figure 1.
Answer 6
(a) Frank is operating in a market close to perfectly competitive market. The market has identical
product, many firms and no barriers to entry and exit
(b) Tom should produce the amount of output where MR=MC to maximize economic profit.

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Answer 7
Game theory is the strategy to make rational optimal decision.
Football
Play NO play
Cricket Play More Fit Less fit
No play Less fit unfit
Recently, I got an opportunity play both football and cricket and chose to play both since
playing both made me more fit whereas playing only one or none will not make me fit as playing
both. Playing both is the Nash Equilibrium.

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Reference
Bykadorov, I., Ellero, A., Funari, S., Kokovin, S. and Pudova, M., 2016, September. Chain store
against manufacturers: regulation can mitigate market distortion. In International Conference on
Discrete Optimization and Operations Research (pp. 480-493). Springer, Cham.
Gould, E. and Blair, H., 2020. Who's Paying Now? The Explicit and Implicit Costs of the
Current Early Care and Education System. Economic Policy Institute.
Ibrahim, A., 2019, August. Local stability condition of the equilibrium of a constraint profit
maximization duopoly model. In AIP Conference Proceedings (Vol. 2138, No. 1, p. 030020).
AIP Publishing LLC.
Nyborg, K., 2019. Humans in the perfectly competitive market (No. 02/2019). Memorandum.