Note: Answers are in Capitals and
Bold.
1.
The limited amount of time
a person can devote to various activates each day and the fixed amount of
labour available to an economy at a point in time are both examples of a TIME AND LABOUR INPUT CONSTRAINT
2.
In a market economy, the
mechanism used to ration scare goods is PRICE
3.
When the price of a good is
above the equilibrium price a SURPLUS develops. In
this case quantity demanded is LOWER than quantity supplied
4.
According to the law of supply,
the quantity supplied of a goods is POSITIVELY related to its Price
5.
If we observe that when the
price of a good is increased, the total revenue received form the good
decreases, we can conclude that demand is ELASTIC
6.
generally, the amounts of goods
and services an individual can purchase, and therefore his benefits from
consumption is limited by his INCOME
7.
The marginal rate of
substitution between two goods is measured by THE SLOPE OF THE INDIFFERENCE
CURVE
8.
The maximum quantity of output
that can be produced form a given quantity of inputs is determined by a firm’s FINANCIAL
CONSTRAINT
9.
The change in total output
resulting form the employment of an additional unit of a variable input is
called the input’s MARGINAL PRODUCTIVITY
10.
A firm’s short run PERIOD
is defined as the level of output at which average total cost in minimized.
11.
Question: Discuss extensively with appropriate examples
and diagrams the methodology of micro economic analysis.
ANSWER: METHODOLOGY
OF MICRO ECONOMICS – TOOLS OF ECONOMIC ANALYSIS. IT IS POSSIBLE TO IDENTIFY THREE TYPES OF
TECHNIQUES THAT ARE OFTEN EMPLOYED IN ECONOMIC ANALYSIS. THERE ARE VERBAL PRESENTATION, MATHEMATICAL
METHOD AND GRAPHICAL PRESENTATION.
12.
So long as we are focusing on
the relationship between price and quantity demanded, a change in market price
causes a MOVEMENT ALONG the demand curve and is referred to as a change
in QUANTITY DEMANDED. A change in any of the other determinants of
demand causes the demand curve to SHIFT and is referred to as a change in DEMAND
13.
An increase in demand causes
the demand curve to SHIFT OUTWARD and this is referred to as an CHANGE
in DEMAND
14.
Arc elasticity of demand refers
to the elasticity of demand BETWEEN TWO points on a demand curve.
15.
When demand is inelastic, %
change in quantity demanded is GREATER than the % change in price. When
demand is elastic, the % chance in quantity demanded is LESS than the %
chance in price.
16.
Assume that for a particular
demand curve, when price is N70, quantity demanded is 150, and when price is
N50, the quantity demanded is 145. Over this range demand is INELASTIC
17.
The payment for raw materials and
rents on a building are examples of EXPLICIT cost. The interests foregone on retained earnings
that are invested in a firm is an example of IMPLICIT COSTS. The total costs of production represent the
full total costs of production and are equal to FIXED costs plus VARIABLE
costs.
18.
The minimum payment required to
compensate an entrepreneur for her risk-taking and the use of her financial
capital is called PROFIT
19.
Costs that have been incurred
in the past and can no longer be recovered are called BAD DEBTS
20.
The maximum quantity of output
that can be produced from a given quantity of inputs is determine by a firm’s
ISOCOST
21.
Question: What is elasticity of
demand?
ANSWER: THE ELASTICITY OF DEMAND ALSO CALLED PRICE ELASTICITY OF
DEMAND IS MEASUREMENT OF THE DEGREE OF RESPONSIVENESS OF CHANGE IN QUANTITY TO
A CHANGE IN THE PRICE OF THE COMMODITY IN OTHER WORDS IT IS THE % CHANGE IN
QUANTITY DEMANDED % CHANGE IN PRICE.
22.
Question: Briefly but clearly with the aid of diagram
distinguish between Isocost and Isoquant
Answer: Practice the
diagram from your text book because is a must question.
23.
Question: Differentiate between Long run and Short run
equilibrium, Implicit and Explicit costs
ANSWER: BY THE
SHORT-RUN WE MEAN A PLANNING PERIOD SO SHORT THAT THE FIRM IS UNABLE TO
CONSIDER VARYING THE QUANTITIES OF SOME RESOURCES. IT IS POSSIBLE TO THINK OF A
PERIOD SO SHORT THAT NO RESOURCES CAN BE VARIED IN QUANTITY. THEN AS THE PLANNING PERIOD IS LENGTHENED, IT
BECOMES POSSIBLE TO VARY THE QUANTITY OF ONE.
A PROGRESSIVE LENGTHENING OF THE PERIOD PERMITS MORE AND MORE RESOURCES
TO BECOME VARIABLE IN QUANTITY UNTIL, ULTIMATELY, THEY ALL FALL INTO THE
VARIABLE CATEGORY. ANY PERIOD BETWEEN
THAT IN WHICH NO RESOURCES CAN BE VARIED IN QUANTITY AND THAT IN WHICH ALL
RESOURCES BUT ONE ARE VARIABLE CAN LEGITIMATELY BE CALLED THE SHORT-RUN. THE CALENDAR TIME LENGTH OF THE SHORT-RUN
WILL VARY FROM INDUSTRY TO INDUSTRY.
THE DIRECT PAYMENT MADE FOR THE RESOURCES USED IN PRODUCTION ARE
CALLED EXPLICIT COSTS. THEY INCLUDE
DIRECT CASH PAYMENT FOR RAW MATERIALS, WAGES, TRANSPORTATIONS ETC.
IMPLICIT COSTS ON THE OTHER HAND, INCLUDE THE COST INDIRECTLY
INCURRED BY OWNERS OF THE FACTORS OF PRODUCTION. WHAT MAKES THIS COST IMPLICIT IS THAT THEY
HAVE SOME OPPORTUNITY COST ELEMENTS. E.G. SUPPOSE AN INDIVIDUAL SAY ENGINEER
GODWIN DECIDES TO GO INTO BUSINESS AS A BEER DISTRIBUTOR.
HE RESIGNS FROM HIS JOB, WITHDRAWS A SUM OF N7,500 FROM HIS SAVINGS
ACCOUNT AND TURNS HIS GARAGE INTO A SMALL BEER-DRINKING PARLOUR. HIS IMPLICIT COSTS IN THIS OPERATION INCLUDE:
HIS FOREGONE SALARY AS AN ENGINEER, THE INTEREST GIVEN UP ON THE N7,500 USED AS
HIS BUSINESS CAPITAL AND THE FOREGONE RENT ON HIS GARAGE.
24.
Question: What economic assumption is the dynamizing
agent in the cobweb model?
ANSWER: THE ECONOMIC
ASSUMPTION IN THE COBWEB MODEL IS THAT OUTPUT IS NOT VARIABLE IN THE SHORT-RUN
AND THAT TODAY’S SUPPLY DEPENDS ON YESTERDAY’S PRICE.
25.
Question: Draw and explain an explosive cobweb model:
Answer: Learn this
explosive cobweb in your text book.
26.
Question: What condition satisfies the equilibrium of
the firm?
ANSWER: THE FIRM IS
IN EQUILIBRIUM WHEN IT EQUATES THE RATIO OF THE MARGINAL PRODUCTIVITIES OF
FACTORS TO THE RATION OF THEIR PRICES.
PUT DIFFERENTLY, WE SAY THAT THE FIRM IS IN EQUILIBRIUM WHEN IT
MAXIMIZES OUTPUT.
27.
Question: Use relevant diagrams to discuss the three
stages of production
Answer: Learn the diagrams
in your text book, but here are the three stages
STAGE 1. IS SHOWN IN THE ABOVE FIGURE FROM 0-L2 FROM 0 TO L1 THE
TOTAL PRODUCT STARTS BY INCREASING AT AN INCREASING RATE MAKING THE AVERAGE
PRODUCT TO BE INCREASING UNTIL THE MP REACHES IT MAXIMUM.
STAGE 2. STARTS WITH EQUALITY
OF MP AND AP AT IT PEAK IN L2. BETWEEN L2 AND L1, LABOUR EMPLOYED, THE TP
CONTINUES TO INCREASE AT A DECREASING RATE.
STAGE 3. STARTS WHERE THE TP
REACHES IT MAXIMUM AND IS ZERO. THE STAGE LIES WHERE THE T.P IS DECREASING, AP
IS POSITIVE AND LIES ABOVE THE MP WHILE THE MP IS NEGATIVE.
28.
Question: Write short note on Budget line, Indifference
curve, Isoquant, Short run equilibrium and marginal rate of substitution.
ANSWER: THE BUDGET
CONSTRAIN LINE SHOWS ALL THE DIFFERENT COMBINATIONS OF AT LEAST TWO COMMODITIES
THAT A CONSUMER CAN PURCHASE, GIVEN HIS OR HER MONEY INCOME AND THE PRICES OF
THE TWO COMMODITIES.
INDIFFERENCE CURVE: AN INDIFFERENCE CURVE SHOWS THAT VARIOUS COMBINATIONS
OF COMMODITY X AND COMMODITY Y WHICH YIELDS EQUAL UTILITY OR SATISFACTION TO
THE CONSUMER, SO THAT HE IS INDIFFERENT
AS TO THE PARTICULAR COMBINATION HE CONSUMES.
ISOQUANT: AN ISOQUANT IS THE LOCUS OF ALL INPUT COMBINATION THAT
YIELD THE SAME LEVEL OF OUTPUT. IT IS A
PRODUCTION FUNCTION.
MARGINAL RATE OF SUBSTITUTION: THE SLOPE OF AN INDIFFERENCE CURVE AT
ANY ONE POINT IS CALLED THE MARGINAL RATE OF SUBSTITUTION OF TWO COMMODITIES, X
AND Y AND IS GIVEN BY THE SLOPE OF THE TANGENT AT THAT POINT. THE MARGINAL RATE OF COMMODITY SUBSTITUTION
OF X AND Y IS DENOTED AS THE NUMBER OF UNITS OF COMMODITY Y THAT MUST BE GIVEN
UP IN EXCHANGE OF AN EXTRA UNIT OF COMMODITY X SO THAT THE CONSUMER MAINTAINS
THE SAME LEVEL OF SATISFACTION.
EQUILIBRIUM IN THE SHORT-RUN IN PERFECT MARKET: THE CRITERIA FOR
ATTAINING EQUILIBRIUM IS THAT PROFIT OF THE FIRM SHOULD BE MAXIMISED, SUCH THAT
THE FIRMS PRICE AND OUTPUT POLICY DOES NOT CHANGE. THE FIRM MAXIMISES PROFIT AT THE OUTPUT WHERE
MARGINAL COST EQUALS MARGINAL REVENUE (MC=MR).
SINCE IF (MR>MC) THAT IS A SITUATION WHERE THE FIRM IS ADDING MORE
REVENUE THAN IT IS ADDING TO COST, THE FIRM WILL DESIRE TO INCREASE ITS OUTPUT:
WHILE ON THE CONTRARY, IF THE (MR<MC), THAT IS ADDING MORE TO ITS COST THAN
TO REVENUE, THE FIRM WILL WISH TO CUT DOWN PRODUCTION. EQUILIBRIUM IS ACHIEVED AT THE OUTPUT LEVEL
WHERE MR=MC.
IN A SHORT-RUN, THE INDUSTRY IS IN EQUILIBRIUM AT THE PRICE WHERE
THE MARKET DEMAND IS EQUAL TO THE MARKET SUPPLY.
NOTE: WHILE ISOQUANT DESCRIBES OUTPUT LEVEL OF THE FIRM, ISOCOST
DECRIBES FACTOR INPUT PRICES.
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