Question

1. How is opportunity cost significant in terms of production function? (4marker)
2. Explain Marginal Revenue and Average Revenue in perfect competition with the help of a diagram. (6marker)
3. Explain Price Ceiling and Floor Price with examples. (6marker)

Answer 1

Answer:

1.The concept of opportunity cost occupies an important place in economic theory. ... The opportunity cost of anything is the alternative that has been foregone. This implies that one commodity can be produced only at the cost of foregoing the production of another commodity.

2 Ans - Marginal revenue is the change in total revenue when one more unit of a commodity is sold.

MR= change in TR/change in quantity sold

Average revenue refers to revenue per unit of output.

AR=TR/Q

Relationship between AR and MR:

a) When AR is decreasing, MR should be decreasing faster than AR. Thus, downward sloping MR curve is below the downward sloping AR curve(a situation of monopoly and monopolistic competition)Image result for AR MR CURVE UNDER

b) If AR is constant, MR is equal to AR. Both are indicated by the same horizontal straight line(a situation of perfect competition)Image result for AR MR CURVE UNDER

c) MR can be negative, but not AR.

3 Ans - A price floor is a minimum price at which a product or service is permitted to sell. ... The most important example of a price floor is the minimum wage. A price ceiling is a maximum price that can be charged for a product or service. Rent control imposes a maximum price on apartments in many U.S. cities.