Abstract Microeconomics is the study of the behavior of individual economic agents, within the context of scarce resources and insatiable human wants, with the aim of maximizing utility. This text concerns itself with, among other things, the rationality of consumer choices, the concepts of total and marginal utilities and the efficiency of labor and capital inputs in production.
¶ … principal of rational choice takes into account the concept of choice and opportunity cost, brought about by the scarcity of economic resources. It assumes that individuals would always prefer that alternative that yields the highest utility. The theory of rationality has three basic underlying properties: completeness, transitivity, and continuity.
The completeness principal holds that, an individual would always strictly prefer one alternative to another, unless the two alternatives yield equal benefits. In the words of Nicholson and Synder (2012), "faced with two alternatives A and B, an individual can always specify one of three alternatives: either 'A is preferred to B', 'B is preferred to A' or 'A and B. are equally attractive'" (p.89). Transitivity seeks to ensure consistency in decision making, such that, if a given alternative (say alternative X) is preferred to some other alternative (perhaps alternative Y), and Y is of greater significance than yet another alternative (i.e. alternative Z), then alternative X should ordinarily (and perhaps strictly) be preferred to Z (Nicholson & Synder, 2012). The concept of continuity, as explained by Nicholson and Synder (2012), holds that "if an alternative A is preferred to B, then situations suitably 'close to' A must also be preferred to B" (p.89).
Question Two
The law of demand in basic terms refers to or is used in reference to the inverse relationship between the quantity demanded and the price of a commodity. The concept of diminishing marginal utility has been put forward as one of the causes of the downward sloping nature of the demand curve. According to the law of diminishing marginal utility, as more and more quantities of a commodity are consumed, the utility derived from the consumption of each additional unit declines (Baumol & Blinder, 2011). Marginal utility, in monetary terms, refers to the additional amount that a consumer is willing to part with in order to purchase an additional unit of a commodity. It is important to note, at this point, that optimum purchases are made at the point where price equals marginal utility (Baumol & Blinder, 2011). When price falls, a rational consumer would maximize his/her utility by increasing the quantity purchased "to that point where the marginal utility equals the lower price" (Baumol & Blinder, 2011, p.91). The concept of diminishing marginal utility, therefore, explains the negative sloping nature of the demand curve.
Question Three
Total utility, in the words of Baumol and Blinder (2011), "is measured by the total amount of money that a consumer would give up to obtain a good" (p.99). The principle of rationality asserts that consumers always aim at maximizing their total utility. Marginal utility, on the other hand, refers to "the maximum amount that a consumer is willing to pay for an additional unit of a commodity" (Baumol & Blinder, 2011, p.99). Total utility increases with increasing consumption, up to a certain point, beyond which it begins to decline, whereas marginal utility diminishes from the start (the concept of diminishing marginal utility).
Question Four
Double- Decker tacos (P=$1)
Chicken Burrito Supremes (P=$2)
Q
TU
MU
MU/P
Q
TU
MU
MU/P
0
0
0
0
1
20
20
20
1
28
28
14
2
34
14
14
2
46
18
9
3
44
10
10
3
54
8
4
4
48
4
4
4
56
2
1
5
48
0
0
5
56
0
0
6
42
-6
-6
6
52
-4
-2
Like I mentioned earlier on in this text, optimal purchases are made at the point where price equals marginal utility (when MU/P=1). 6 tacos and 2 burritos would not be the utility maximizing combination since at these quantities; MU does not equal the prices. The utility maximizing combination would comprise of 4 burritos and 2 tacos.
Question Five
Marginal product refers to the change in the level of output due to a unit change in the level of production inputs. In the short run, labor is considered a variable input whereas capital is assumed to remain fixed. The law of diminishing marginal productivity, in the words of Sexton (2010), holds that, "if a variable input increases, with other inputs fixed, a point will be reached where the additions to output will eventually decline" (p.295). This, however, only holds in the short run, since "the long run is a period long enough for all inputs to be varied, hence, the costs (all variable) will change as output changes" (Sexton, 2010, p.295).
Question Six
Fixed costs are those costs that remain constant, at different levels of activity or output. For instance, the amount of rent paid on leased equipment is constant, regardless of the level of output. Fixed costs would therefore be incurred even at zero levels of production (Sexton, 2010). Variable costs, on the other hand, increase with increasing levels of production. Labor costs, in form of salaries and wages, for instance, would go up if more people are employed in order to realize an increase in the level of production. Total cost is the "summation of all variable (TVC) and all fixed costs (TFC)" (Sexton, 2010, p.299). In the long run, however, there are no fixed costs; all the costs change with changing output levels (Sexton, 2010).
Question Seven
The u-shape exhibited by the MC and AVC curves is due to the changing levels of marginal product. According to Sexton (2010), the marginal product and, marginal costs of operation are inversely related. Low levels of output would call for an increase in, for example, the amount of labor input, in an attempt to increase current production to more sustainable levels. With fixed levels of capital input, this move would result in a declining marginal product of labor. On the other hand, at very high levels of output, overutilization of existing equipment and machinery would imply decreasing marginal product of capital. In the words of Sexton (2010), "it is this diminishing marginal product that causes marginal costs to increase, eventually causing the average variable costs to rise" (p.302).
Question Eight
Number of workers
Total product marginal product
Average Product
0
0
0
1
10
10
10
2
25
15
12.5
3
32
7
10.7
4
35
3
8.75
5
36
1
7.2
6
35
-1
5.83
7
32
-3
4.57
Diminishing marginal productivity is experienced when 25 units of output are realized, using 2 units of labor (the level of output that yields the maximum marginal product). Increasing marginal productivity is experienced when 35 units of output are produced using 6 units of labor input. Diminishing absolute productivity is experienced when 25 units of output are realized, using 2 units of labor (the level of output beyond which average productivity begins to decline).
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