Question

Assuming that each of the following functions are linear, give an economic interpretation of the slope of the function:

a) F(q) is the revenue from producing q units of output;

b) G(x) is the cost of purchasing x units of some commodity;

c) H(p) is the amount of the commodity consumed when its price is p;

d) C(Y) is the total national consumption when national income is Y;

e) S(Y) is the total national savings when national income is Y.

Answer 1

a) F(q) is the revenue from producing q units of output. The slope of this function is known as  the marginal revenue which is the addition to the total revenue when the producer sells an additional unit of output. That is it tells us the increase in the total revenue when the producer sells one more unit of output.

b) G(x) is the cost of purchasing x units of some commodity. The slope of this function is the marginal cost which is the addition to the total cost when an additional unit of the commodity x is purchased. That is it tells us the increase or decrease in the total cost when one more unit of commodity x is purchased.

c) H(p) is the amount of the commodity consumed when its price is p. The slope of this function tells us the change in quantity demanded due to change in the price of the commodity. That it tells us the amount by which the quantity demanded will change if the price of the commodity increases or decreases.

d) C(Y) is the total national consumption when national income is Y. The slope of this function is the marginal propensity to consume which measures the change in consumption due to change in income. That is it tells the increase or decrease in consumption due to a unit increase or decrease in income.