EAR611S-2014
Economics of Agriculture
TUTORIAL QUESTIONS
The aim of the activity questions is to broaden your understanding of the subject, not only from a technical perspective, but from an analytical perspective as well. Most of the activity questions focus on the theory and are aimed at helping you understand the concepts covered in the lectures.
Question 1 (40)
A firm uses only two inputs, capital and labour. The capital input is fixed at five units in the short run, but labour is variable. One unit of capital costs R100 and one unit of labour costs R300. The total production of the firm, for the given units of inputs is shown in the table below.
QK / QL / TPP / APP / MPP / TFC / TVC / TC / AFC / AVC / ATC / MC5 / 0 / 0
5 / 1 / 5
5 / 2 / 12
5 / 3 / 21
5 / 4 / 32
5 / 5 / 42
5 / 6 / 50
5 / 7 / 56
5 / 8 / 60
5 / 9 / 62
a)Calculate the values of APP and MPP. (4 marks)
b)Calculate the TFC, TVC and TC values, given the quantities of inputs and the costs of the inputs. (5marks)
c)Calculate the AFC, AVC, ATC and MC values, for the various levels of output.
(8 marks)
d)Present the TPP, APP and MPP curves graphically.(6 marks)
e)Present the ATC, AVC, AFC and MC curves graphically on the same set of axes.
(8 marks)
f)What is the relationship between MPP and MC, and between APP and AVC?
(3marks)
g)What is the law of diminishing returns? At what point on your graph does the law come into operation? Explain in terms of the TPP, APP and MPP curves. (4 marks)
h)How is the law of diminishing returns reflected in the cost structure of the firm?
(2 marks)
Question 2 (15)
SupposeFeedMaster Namibiaproduces10,000Kg of Eco Grassveld licka dayusingonlytwofactorsofproduction:capital(K)andlabour(L).ThepriceoflabourisN$100aday and thepriceofcapitalisN$200aday,andthetotaldailycostofproducing10,000Eco Grassveld lickadayis N$50,000.
a)Whatistheequationfortheisocostcurvecorrespondingtoa totalcostofN$50,000a day? (2marks) Drawthisisocostcurveandindicateallrelevantpoints.(1mark) Addaconvex isoquant tangenttotheisocostcurveat200unitsoflabourperday(point A).Howmanyunitsof capitalperdayareemployed? (1mark)
b)Explainwhythepointoftangencybetweentheisocostandtheisoquantdescribedin parta) isalong-runequilibrium. (2marks)
c)WhatisthevalueoftheMRTSatthepointoftangencyina)above?(2marks)Whathappens tothe valueoftheMRTSas wemovedownalongtheisoquant?(1mark)Whathappens tothevalueofthe marginalproductsoflabourandcapitalaswemovedownalongthe isoquant? (2mark)
d)SupposenowthatthepriceofcapitalfallstoN$150adaywhilethepriceoflabourcontinuesat N$100a day.FurthersupposethatFeed Master Namibiachoosestoproducethesamedailyoutputasbefore. Drawthe newisocostcurveinthesamediagramandshowFeed Master Namibia’snewlong runequilibrium (pointB).(1 mark)Hasthecombinationofcapitalandlabourchanged?If it has,explain why. (3marks)