Explain the meaning of law of diminishing marginal returns

Reference no: EM131437208

QUESTION 1 -

1.1 John Scott has R200 per week available to spend on beer and cigarettes. Beer costs R10 per bottle and cigarettes cost R40 per packet. Suppose John buys 8 bottles of beer and 3 packets of cigarettes and that his marginal utility from beer is then 20 utils and that from cigarettes 35 utils. Is he in equilibrium? If not, should he buy more beer or more cigarettes? Explain.

1.2 You tell a friend that, as a consumer, she rearranges her purchases until the weighted marginal utilities for all goods are equal. She replies: "That is ridiculous. I don't even know what marginal utility is. How can I be doing something I don't even know about?" How will you respond?

1.3 Draw and explain the graph demarcating the indifference map with three indifference curves and illustrate the optimum level of consumption as guided by the consumption smoothing.

QUESTION 2 -

2.1 Explain the meaning of the law of diminishing marginal returns. Use a diagram to illustrate your explanation.

2.2 Consider the production function for tomatoes in ZZ2: Y= X + 4X² - 0.2X³

a) Derive marginal value product (VMP) and average value product (AVP) equations of tomatoes in ZZ2 when the price of inputs is R12 and the price of output is R24.

b) At what levels of X do the TPP of tomatoes reach its maximum?

c) At what level of X does stage two (II) begin or stage one (I) end for the production of tomatoes in ZZ2?

d) Find and interpret elasticity of tomato production (Ep) when X= 1.

QUESTION 3 -

3.1 Prove that the utility approach and the indifference curve approach yield the same consumer equilibrium.

3.2 Which of the following items are more likely to be inferior goods: New Holland tractor, hay, plant residue, restaurant meals, polyester suits? Explain your answer.

3.3 Consider a consumer's choice between meat and fish. Use indifference curves to illustrate the income effect and substitution effect of an increase in the price of fish.

QUESTION 4 -

Explain thoroughly why perfect competition is able to make economic profit, economic loss and normal profit in the short-run while in the long-run is only making normal profit.

Reference no: EM131437208

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