Question

1 What is the Law of Diminishing Returns? Draw an Isoquant where the law of diminishing returns holds.

2 What figure is similar to the isoquant, but instead of inputs it maps out all the possible combinations of outputs that can be produced with a given set of inputs? Draw the associated graph.

3 What is the difference between risk and uncertainty?

4 Assume a domestic market imposes a tariff on foreign goods. How will this affect the domestic price? If the foreign market has highly inelastic supply and the domestic market is highly elastic demand, which nation will pay the bulk of the tax?

5 Suppose you own a small business that generates $50,000 in profits. Why might you pay that to yourself as a dividend payment rather than as regular income or a bonus?

Answer 1

1) Law of diminishing returns states that as the quantity of variable factor increases, the returns reduce after an optimum is reached because of other factor being fixed. The marginal product would reduce as we go on adding more and more labor, given the capital is fixed.

The graph above is the isoquant which shows the law of diminishing returns.

2) The figure similar to isoquant is indifference curve. It shows the combinations of output the consumer consumes which gives him same utility.

IC1 is the indifference curve which shows combinations of good X and good Y which give the same utility.

3) Risk is the situation where the individual can make decisions based on probabilities of outcomes while in case of uncertainty, the probability of occurence of event is unknown or uncertain.

In other words risk is a known outcome with known probabillity and uncertainty is known outcome with uncertain probability.

(You can comment for doubts)