Economic Issues and Policies

in Global Perspective

Assignment: 3rd

Course Title: Economics

Resource Person: Dr. Rukhsana Kalim

Submitted By: Asad Ullah ID: F2019273008

Aleem Inam F2019273013
Fasih Abbas F2019273035
Umar Farooq F2019273016
M. Sheraz F2019273012

Program: MBA 1.5 (EVE)

Section: G
 Question No#1 Consider total cost and total revenue of a firm given in the following table:

Quantit 1 2 3 4 5 6 7 8
y
Total $8 9 10 11 13 19 27 37
Cost
Total $0 8 16 24 32 40 48 56
Revenue

A. Calculate profit for each quantity. How much should the firm produce to maximize
profit?

ANSWER:

We will use this formula in-order to get a result Profit = Total Revenue - Total Cost

Quantity 1:

Profit = 0 – 8

Profit = – 8

Quantity 2:

Profit = 8 – 9

Profit = – 1

Quantity 3:

Profit = 16 – 10

Profit = 6

Quantity 4:

Profit = 24 – 11

Profit = 13

Quantity 5:

Profit = 32 – 13

Profit = 19

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 Quantity 6:

Profit = 40 – 19

Profit = 21

Quantity 7:

Profit = 48 – 27

Profit = 21

Quantity 8:

Profit = 56 – 37

Profit = 19

The firm is indifferent between 6th and 7th quantity of output as the maximum profit it makes is
on 6th and 7th quantity.

Qty. TC TR PROFIT(TR-TC)
1 8 0 -8
2 9 8 -1
3 10 16 6
4 11 24 13
5 13 32 19
6 19 40 21
7 27 48 21
8 37 56 19

The Firm should produce 6 units to maximize profit. Profit is calculated as TR-TC

b. Calculate marginal revenue and marginal cost for each quantity. At what quantity the two
costs match?

ANSWER:

MR = change in TR/change in Q

MC = change in TC/change in Q

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 ΔTR
MR = ΔQ

ΔTC
MC = ΔQ

Quantity 1:

MC = --

MR = --
Quantity 2: Quantity 3:
1
1 MC =
MC = 1
1

MC = 1 MC = 1

8
MR = 8
1 MR =
1
MR = 8
Quantity 4: MR = 8
1
MC =
1 Quantity 5:

MC = 1
2
8 MC =
MR = 1
1
MR = 8 MC = 2
Quantity 8:
Quantity 6:
8 10
6 MR = MC =
MC = 1 1
1

MC = 6 MR = 8 MC = 10

8
MR = Quantity 7: 8
1 MR =
1
MR = 8
8
MC = MR = 8
1

MC = 8

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 Qty. TC AC TR MR TFC AFC TVC AVC MC
1 8 - 0 - 8 - 0 - -
2 9 9 8 8 8 8 1 1 1
3 10 5 16 8 8 4 2 1 1
4 11 3.67 24 8 8 2.67 3 1 1
5 13 3.25 32 8 8 2 5 1.25 2
6 19 3.8 40 8 8 1.6 11 2.2 6
7 27 4.5 48 8 8 1.3 19 3.167 8
8 37 5.29 56 8 8 1.14 29 4.14 10

At 7th quantity two cost matched so, the firm should produce 7 units.
Y

10 MR

MR 8 MR
&
7
MC
MR= MC = 8
6
5

3
2

0 1 2 3 4 5 6 7 8 X
Qty

This Graph illustrate that curves cross each other at 7th quantity of
output. By this approach of MC=MR, we can say that the firm should
produce 7 units of output.

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 Question No#2 An industry has currently 100 firms, all of which have fixed cost of Rs16
and average variable cost as follows:

Quantity Average Variable Cost

1 Rs 1
2 2
3 3
4 4
5 5
6 6

a. Compute Marginal Cost and Average total cost.

Answer:

TC
Average total cost =
Q

VC = AVC × Q TC = FC + VC

VC = AVC ×Q MC = FC + VC

VC = 1 ×1 =1 MC = 16 +1 = 17

VC = 2 ×2 =4 MC = 16 +4 = 20

VC = 3 ×3 =9 MC = 16 +9 = 25

VC = 4 ×4 = 16 MC = 16 + 16 = 32

VC = 5 ×5 = 25 MC = 16 + 25 = 41

VC = 6 ×6 = 36 MC = 16 + 36 = 52

Marginal cost:

Quantity 1:

Mc = 1

Quantity 2: Quantity 3:

ΔTC
MC =
ΔQ

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 ΔTC
MC =
ΔQ

20−17
MC =
2−1

3
MC =
1

MC = 3
Quantity 4: Quantity 5:

ΔTC ΔTC
MC = MC =
ΔQ ΔQ

41−32
MC =
5−4
12−25
MC =
4−3 9
MC =
1

MC = 9
7
MC =
Quantity1 6:

ΔTC
MC =
ΔQ

52−41
MC =
6−5

11
MC =
1

MC = 11

AVERAGE TOTAL COST:

Quantity 1: Quantity 2:

FC +VC FC +VC
ATC = ATC =
Q Q

16+1 16+4
ATC = ATC =
7 1 2
 Quantity 3: Quantity 4:

FC +VC FC +VC
ATC = ATC =
Q Q

16+9 16+16
ATC = ATC =
3 4

25 32
ATC = ATC =
3 4

ATC = 8.33 ATC = 8

Quantity 5: Quantity 6:

FC +VC FC +VC
ATC = ATC =
Q Q

16+25 16+36
ATC = ATC =
5 6

41 52
ATC = ATC =
5 6

ATC = 8.2 Q AVC MC ATC

1 1 1 17

2 2 3 10

3 3 5 8.33

4 4 7 8

5 5 9 8.2

8 6 6 11 8.67
 b. Explain the relationship between Average total cost and marginal cost.

Answer:

a. Marginal Cost:
Marginal cost is the additional cost incurred in the production of one more unit of a good or
service. It is derived from the variable cost of production, given that fixed costs do not change as
output changes, hence no additional fixed cost is incurred in producing another unit of a good or
service once production has already started.
It is calculated by taking the total change in the cost of producing more goods and dividing that
by the change in the number of goods produced (Quantity). Marginal Cost indicates the rate at
which the total cost of a product changes as the production increases by one unit.
Formula:
ΔTC
Marginal cost (MC) =
ΔQ
Where:
∆ = Change
TC = Total Cost
Q = Quantity

b. Average Total Cost:

Average total cost is the sum of all the production costs divided by the number of units produced.
The Total Cost is the summation of all the costs of production. It will include the total fixed costs
and the total variable costs of the production. This total cost divided by the total number of
outputs will give us the Average Total cost of production.

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 Formula:

FC +VC
ATC =
Q

The average total cost formula shows the cost per unit of the quantity produced and is calculated
by taking two figures where the first one is total production cost and the second one is the
quantity produced in numbers and then the total cost of production is divided by the total
quantity produced in numbers.

Relationship Between Average Total Cost and Marginal cost:

The relationship between the marginal cost and average total cost is the same as that between any
other marginal-average quantities. When marginal cost is less than average total cost, average
total cost falls and when marginal cost is greater than average total cost, average total cost rises.

 Whenever marginal cost is less than average total cost, average total cost is falling.
 Whenever marginal cost is greater than average total cost, average total cost is rising.
 The marginal-cost curve crosses the average-total-cost curve at the efficient scale.
 Efficient scale is the quantity that minimizes average total cost (S)
Y

MC
ATC

S
P

X
O Q Q1

 When ATC is falling, MC < ATC

 When ATC is Rising, MC > ATC
 When AC is constant (at point S), MC = ATC

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  MC is always to the left of AC and cuts AC from its lowest part

Example:

Suppose that a cricket player’s batting average is 50. If in his next innings he scores less than 50,
say 45, then his average Total score will fall because his marginal (additional) score is less than
his average score.
If instead of 45, he scores more than 50, say 55, in his next innings, then his average score will
increase because now the marginal score is greater than his previous average score. Again, with
his present average runs of 50, if he scores 50 also in his next innings, then his average total
score will remain the same because now the marginal score is just equal to the average total
score.

Question No#3 Define the concept of explicit cost and implicit cost. Give the example of
each type of these costs.
Answer:

a. Explicit Cost:
According to economists’ Explicit cost is the opportunity cost of resources employed by a firm
that takes the form of cash payments. A firm’s explicit costs are its actual cash payments for
resources: wages, rents, interest, insurance, taxes and the like.
The actual payment by firms to labor, capital, and other factors of production. Whether these
costs are fixed or variable, they are straightforward: they are the amounts that firms must pay to
owners of the resources in order to bid these resources away from alternative uses.
Explicit costs, also called accounting costs, are out-of-pocket costs, such as expenses on labor,
raw materials, and rent. Implicit costs are cost’s a business incurs without actually spending
money.

Example 1:

Umar Farooq earns Rs.50,000 a year as a product manager with the PEL Electronics. On his way
home from work one day, he gets an idea for making display pallets, more reliable and wooden
texture. He decides to quit his job and start a business, which he calls Umar and sons pallets

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 maker. To buy the necessary machines and equipment, he withdraws Rs.20,000 from his savings
account, where it was earning interest of Rs.10,000 a year. He hires an assistant Fasih Abbas and
starts producing the Pallets using the spare space in his parking garage that he had been renting
to a neighbor for Rs.1000 a month. Sales were slow at first, Asad khan his friend was keep
telling him he is just trying to reinvent the Pallet, but his pallets eventually get rolling. When
Umar Farooq and his accountant examine their small business performance after the first year,
they are quite pleased. Company revenue in 2019 totaled Rs.105,000. After paying his assistant
and for materials and equipment, the firm shows an accounting profit of Rs. 64,000. Accounting
profit equals total revenue minus explicit costs.

Total Revenue Rs,105,000

Less Explicit Cost

Assistant Salary -Rs,21,000

Material and Equipment -Rs,20000

Equals accounting profit Rs.64,000

Example 2:

Cheezious company are going to launch Fast food company. For this they have purchased
equipment’s of 1000000 Rs and payed 50,000 Rs rent for the building and spend 100,000 Rs for
the purchase of raw material for making of fast food. So, in this case the explicit cost is
1150,000.

b. Implicit Cost:

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 A firm’s opportunity cost of using its own resources or those provided by its owners without a
corresponding cash payment. This include the use of a company-owned building, use of
company funds, or the time of the firm’s owners. Like explicit costs, implicit costs are
opportunity costs. But unlike explicit costs, implicit costs require no cash payment and no entry
in the firm’s accounting statement, which records its revenues, explicit costs, and accounting
profit.
Implicit cost is the opportunity cost of using resources owned by the firm. These are opportunity
costs of resources because the firm makes no actual payments to outsiders.

Example# 1 Continued:

But accounting profit ignores the opportunity cost of Umar’s own resources used in the firm.
First is the opportunity cost of his time. Remember, he quit a Rs50,000 a year job to work full
time on his business, thereby forgoing that salary. Second is the Rs10,000 annual interest he
passes up by funding the operation with his own savings. And third, by using the spare space in
the garage for the business, he forgoes Rs 1,000 per month in rental income. The forgone salary,
interest and rental income are implicit costs because he no longer earns income generated from
his best alternative uses.

Example# 2 Continued:

Cheezious company of fast own a building which is used for its own operations, instead of
renting out to other firms. The Cheezious company has a net profit of Rs50,000 per month and
the opportunity cost of rent is Rs30,000 per month. The Rs30,000 which is forgone is the
implicit cost for Cheezious.
The economics profit for Cheezious company will be 50,000 – 30,000 = 20,000 per month.

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