Question

1) Law of Diminishing returns and Law of Marginal utilities public goods and private goods and how they are paid for and rationed?

2) Perfect Competition

(a) # of firms

(b) Barriers to entry

(c) Is the product homogeneous or heterogeneous

(d) Ads

(e) Firm is price taker

(f) Draw a diagram

Answer 1

1. The law of diminishing returns shows that as production increases, beyond a point returns to production declines. In case of public goods the law of diminishing returns will not be clearly calculated as they are not produced with a profit motive in mind. For public goods diminshing marginal utility will set in at a high level of consumption as the cost of public goods is free. For private goods the diminishing returns will set in when the marginal product turns negative for an additional unit produced. Diminishing utility occurs when the total utility of the consumer declines with an additional unit of the private consumed.

2. (a) There are a large numer of firms under perfect competition. (b)There are no barriers to entry or exit. (c) The products are always homogeneous as all firms produce the same goods. (d) There will be no ads as all products are homogenous. (e) Firms are all price takers under perfect competition as they have no market power.