Microeconomics Assignment: Production, Supply, Demand, and Cost

This microeconomics assignment solution addresses key concepts including production possibilities, comparative advantage, and opportunity cost, demonstrated through numerical examples and graphical representations. The solution analyzes the production of coffee and nuts, illustrating specialization and trade. It further examines market supply, elasticity of demand, and revenue maximization. The assignment delves into supply curve analysis for individual firms and the market, including increasing, decreasing, and constant cost industries. It also presents a detailed exploration of the production possibility curve, comparative advantage, and the factors influencing its shape. The solution provides a comprehensive understanding of microeconomic principles and their application to real-world scenarios, including the impact of price changes on revenue and the dynamics of market equilibrium.

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................5
Answer 3..........................................................................................................................................6
Answer 4..........................................................................................................................................7
References......................................................................................................................................12

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Answer 1
1)a)
i) Jara can pick a maximum (4*6)= 24 kilograms of coffee. Peng in 6 hours can pick (2*6)= 12
kilograms of coffee. Therefore, Jara and Peng together can pick a maximum (24+12)= 36
kilograms of coffee.
ii) Similarly, the maximum kilograms of nuts that the two can pick is obtained as –
Maximum nuts Jara can pick + Maximum nuts Peng can pick= (2*6) + (4*6)= 12+24 = 26
kilograms of coffee.
iii) In 1 hour, Jara can pock either 4 kilograms of coffee or 2 kilograms of nuts. Therefore,
opportunity cost for coffee is (2/4)=1/2=0.5. The opportunity cost for nut is (4/2)= 2. In contrast,
Peng can pick 2 kilograms of coffee or 4 kilograms of nuts. The opportunity cost for coffee for
Peng is (4/2)=2 and that for nut is (2/4)= 1/2 =0.5. From the opportunity cost, it is clear that Jara
has a comparative advantage in Coffee and Peng has a comparative advantage in nuts (Johnson
2013). Therefore, in times of choosing maximum number of coffee and starting with 4 kilograms
of nuts, Peng will pick nuts. In rest of 5 hours Peng picks a total of (5*2) = 10 kilograms of
coffee and Jara can pick (4*6)= 24 kilograms of coffee. They together still pick (10+24) = 34
kilograms of coffee.
iv) In the same way, at times of picking maximum kilogram of nuts, Jara would pick coffee
because of lower opportunity cost. In picking 8 kilograms of coffee Jara needs 2 hour while Peng
needs 4 hours. After picking 8 kilograms of coffee Jara would pick (2*4) = 8 kilograms of

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coffee. Peng can pick (4*6) = 24 kilograms nuts. Therefore, they are able to pick (8+24) = 32
kilograms of coffee.
v) It is possible for Jara and Peng to pick together 26 kilograms of nuts and 20 kilograms of
coffee. In order to attain this combination of coffee and nuts, Jara produces 20 kilogram of
coffee, which needs 5 hours and pick 2 kilograms of nuts. Peng on the other hand produces only
24 kilograms of nuts.
b)i) 30 kilograms of coffee and 12 kilograms of nuts is a attainable point. Jara uses 6 hours to
pick a total of (4*6) = 24 kilograms of coffee. The rest (30-24)= 6 kilograms of coffee is left for
Peng to pick up. Peng needs 3 hours to produce 6 kilograms of coffee. In rest of the 3 hours Peng
would pick (3*4) = 12 kilograms of coffee. This is not efficient because Peng is more efficient in
producing nuts. Here, Peng has to devote 3 hours in picking nuts rather than specializing only in
nuts.
24 kilograms of coffee and 24 kilograms of nuts is an attainable and efficient point. Here,
Jara produces only coffee and Peng produces only nuts.
ii)

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Figure 1: Different feasible production points and PPC
iii) In the world market, Jara specializes completely in coffee and Peng specializes completely in
nuts. At the world price of $2 per kilogram of coffee and $ 2 per kilograms of nuts Jara and Peng
could earn ($2*24)+($2*24)= $48+$48= $96.
iv) In the world market with complete specialization Jara and Peng have $96 to spend in the
world market. Thus, the maximum amount of coffee they can buy is ($96/2) = 48 kilograms.
Similarly, the maximum amount of nuts they can buy is ($96/2) = 48 kilograms.
Total cost of 40 kilograms of nuts and 8 kilograms of coffee is ($2*40) + ($2*8) = $80+
$16=$96.
Revenue earned from the world market is $96. This is enough to cover the cost. Therefore, it is
possible to consume 40 kilograms of nuts and 8 kilograms of coffee.
v)

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Figure 2: Consumption possibility curve
Answer 2
Supply curve of firm 1 is P = 2Q1 or, Q1= P/2.
Supply curve of firm 2 is P = 2+Q2 or Q2= P – 2.
Horizontal summation of firm supply curve gives the market supply curve in the industry.
Putting arbitrary prices supply schedule for firm 1, firm 2 and the market supply schedule is
obtained as-
Price Q1 Q2 Q1+Q2
2 1 0 1
4 2 2 4
6 3 4 7
8 4 6 10
Table 1: Supply schedule for Firm 1, Firm 2 and Market
(Source: as created by Author)

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Figure 3: Individual firm and market supply curve
(Source: as created by Author)
Answer 3
a)From the demand schedule given, the demand curve for croissants in Geelong is obtained as-
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
0
1
2
3
4
5
6
7
NUMBER OF CROISSANTS PURCHASED PER
DAY
NUMBER OF CROISSANTS
PURCHASED PER DAY
Figure 4: Demand curve of croissants in Geelong
b) Price elasticity is the percentage change of demand in line with change in price (Tarasova and
Tarasov 2016).

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Price Elasticity = Percentage change ∈demand at a point
Percentage change∈ price at that point
P Q dP dQ
% change in
price % change in quantity
Elasticit
y
3 9000 1 3000 33.33333333 33.33333333 1
Price elasticity at price $3 is -
dq
dp∗q
p
=
3000
1 ∗3
90000
= 1
c)
Price (P) Quantity Purchased (Q)
Revenue
(P*Q)
6 0 0
5 3000 15000
4 6000 24000
3 9000 27000
2 12000 24000
1 15000 15000
0 18000 0
When, all the bakeries increased price from $3 to $4, then quantity demanded decreased and as a
consequence revenues decreases from 27,000 to 24,000.
d) Price elasticity at point of $2 is-
P Q dP dQ
% change in
price
% change in
quantity
Elasticit
y
2 12000 1 3000 50 25 0.5

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e p=
dq
dp∗q
p
=
3000
1 ∗2
12000
= ½= 0.5.
e) When, all the bakeries increase price from $2 to $3, then demand decreases from 12,000 to
3000. However, because of lower elasticity in demand, increase in price offsets the reduction in
demand and hence revenue increases from $24,000 to $27,000.
Answer 4
a) Economic production is constrained with limited resources. It is optimal for the country to
choose the production point efficiently. The points on the production possibility curve reflect the
attainable production points. Comparative advantage is realized by computing the opportunity
cost of different combination of goods and services (Dong and Wong 2017). When the country
chose to increase production of one good given resource constraints, then resources need to shift
from one industry to other. However, not all the resources are suitable for all the industry. This
leads to inefficient of the nation and increases opportunity cost. This is reason for concave shape
of production possibility curve.

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Figure 5: Comparative advantage and Production possibility curve
(Source: As created by Author)
In order to illustrate the concept of production possibility curve and associated concept of
comparative advantage consider the example of drainpipes and butter. Suppose the country is
engaged in the production of only two goods namely drainpipes and butter. Increase in
production of any one commodity requires reduction in production of other. Now, the
opportunity cost for obtaining 1unit of butter is not same with that of obtaining 1 unit of
drainpipes. The computation of opportunity cost is important while taking production. Goods
with lower opportunity cost and thus having a comparative advantage explains the flattest part of
PPC (Nicholson and Snyder 2014). On the other hand, the steepest part of the production
possibility curve is associated with higher opportunity cost and hence a comparative
disadvantage. The bulge shape in between the extreme shape is representative of increasing
opportunity cost for producing comparative disadvantageous good (Nguyen and Wait 2015).
b) The long run industry supply curve in the competitive industry depends on the behavior of
individual firm, which in turn depends on prices of factor input. There are three different types of

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supply curve- positively sloped, negatively sloped and flat horizontal supply curve. The factor
cost in the industry determines the shape of the supply curve (Friedman 2017.).
Increasing cost industry
An industry is said to be increasing cost industry in case when set of cost curves shifts
upward with increasing output (Moulin 2014).
Figure 6: Long run supply curve with increasing cost
(Source: Rubinfeld and Pindyck 2013)
In the above figure, point ‘A’ in panel (a) is the primary equilibrium point. P1 and Q1 are the
respective price and quantity corresponding to A. Now consider an increase in demand. The new
demand curve is DD1. High demand raises price and thus increases profitability of the firms. New
firms enter in the market and increase cost curves. All the short run and long run cost curves
have shifted upward. With increasing supply in the market the supply curve shifts to the right
and the new equilibrium point is C. The locus of the equilibrium points in the industry give the
industry supply curve LRS.
Decreasing cost industry

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In a decreasing cost industry higher output associated with lower cost (Thomas, Lubinda
and Angula 2015.). With increase in the factor cost, the shape of the supply curve also changes.
Figure 7: Industry supply curve with decreasing cost
(Source: Rubinfeld and Pindyck 2013)
A rightward shift in the demand curve increases the price in the competitive industry.
With supernormal profit, new firms join the industry. Because of decreasing cost, short and long
run cost curves now shift downward. This leads to a much larger increase in supply and drives
down prices to some extent. The new equilibrium is C. Long run supply curve is LRS, obtained
as a negatively sloped curve.
Constant cost industry
In constant cost industry, factor cost does not change at all with increasing output
(Carlton and Perloff 2015). The supply curve here is parallel to the horizontal axis. Following
figure shows supply curve in this situation.