Question

Answer all questions
1. Explain the “Law of Equi-marginal utility” as applied in consumer theory
2. Compare the equilibrium of a firm under perfect competition and monopoly
3. Suppose that the total cost function of a firm operating in the short run is given by
TC = Q2+ 24Q+6 Where TC=Total Cost Q= Quantities produced
Required: i) The ATC function ii) The marginal cost function iii) The average variable cost function iv) Calculate the average fixed cost where Q= 8
4. Distinguish between income and substitution effects of a price change for a consumer
5. Discuss the history of development of Economics as a discipline
{Total =30 Marks}

Answer 1

Ans.1.

Law of equi marginal states that when consumer consumes nire to one commodity then he/she is in equilibrium only when the ratio of marginal utilities derived from both the commodities equals the ratio of their prices.And also these ratios should equate to the marginal utility of money.

Symbolically:

MUx/MUy=Px/Py=MUm

Where, x and y are the two commodities.

Px,Py are the respective prices.

MUm is the marginal utility of money.

Ans.2.

Equilibrium of perfect competition-

Market under perfect competition is in equilibrium when price equals average revenue received from the sale of commodity.

Equilibrium of monopoly-

Market under monopoly comes under equilibrium only when the following two conditions are satisfied:

A. Marginal revenue and marginal cost equates,i.e. MR=MC.

B.Marginal Cost should increase after the intersection point.

The difference in deriving the equilibrium arises only because of the varying competitive conditions.Under monopoly there is only one seller and this is why he takes advantage of this and is both the price maker and price taker.Whereas,under perfect competition this feature lacks as consumers here has the perfect knowledge about the market and this is why there is less distortion of consumers here.

Ans.3.

ATC=TC/Q

=Q+24

MC=dTC/dQ

=2Q+24

AVC=TC-Fixed cost

=Q2+24Q+6-6

=Q2+24Q

AFC at Q=8

=(8)2+24(8)+6

=64+192+6=262