ECO 101Introduction to Microeconomics

Section- 24
Spring 2021
Topic: Assignment 04

Submission Date: 1/5/2021

Submitted to:

Nabeel Iqbal

Lecturer

Department of Economics

School of Business and Economics

North South University

Bashundhara, Dhaka-1229

Submitted By:

NAME ID
Ahmad Munyem 2012374630
Question 1 (3 marks)

In 2020, Mr. Adam had two options: either he could start Business A or he could start
Business B.

What could be the implicit cost of Business A? Discuss in detail using the given scenario.

Mr. Adam chose Business A. Now, the economic profit of Business A = − 500 taka per
day. What can you conclude from the given information?

Here business B could be the implicit cost of business A. The cost which made no monetary
value is called implicit cost. If Mr. Adam invests in business B, then he might be gain some
profit. But for the reason of his investment in business A, he has to sacrifice the profit of
business B, which we can call opportunity cost. So here I can say that business B is the
implicit cost of business A

Here we see that the economic profit of business A is -500, which indicates that the ( explicit
cost+ implicit cost) is greater than total revenue. So in this situation, my suggestion for Mr.
Adam is that he should stop investing in business A and shift his investment in business B.
Because if he invests in business B, he might have profited highly.

Question 2 (2 marks)

Using the example of a rickshaw-puller discuss in detail the concept of production.

From the definition of production, we are able to know that production is the transformation
of inputs( resources) into outputs(goods).

For example, if one rickshaw puller drives his rickshaw 5 hours per day, then he earns 1000
taka. So here, 5 hours is the input of time, and 1000 taka is the outcome of income. Now, this
rickshaw puller wants to earn 2000 taka. If this rickshaw puller drives 10 hours his rickshaw
per day, he will earn 2000 taka per day. After increasing variable cost 5 hours to 10 hours in
the input section, we noticed that the income amount also increases from 1000 taka to 2000
taka in the output section.

Question 3 (5 marks)

The following table that of Business Z:

 Machine Labour Q Total Cost (taka) Average Total
Cost (taka)
1 0 0 500 -
1 1 50 600 12
1 2 90 700 7.8
1 3 120 800 6.7

What information about Business Z can you obtain from the given table? Write about
all the information in detail.

Business Z is considering moving to a larger factory. They have come to you for advice.
What could be the advantages and disadvantages of moving to a larger factory? Discuss
in detail using concept of Ch 19.

In this graph, we see that here cost increases with quantity. When quantity 0, the cost is 500.
If the quantity is 50, the cost is 600. When quantity 90, the cost is 700. If the quantity is 120,
the cost is 800. In careful observation, we find that there is a marginal cost increasing valued
100.
In this graph, we have seen that when the quantity increase, the average cost is decreased.
When the quantity is 50, the average cost is 12.. When the quantity is 90, the average cost is
9.8. When the quantity is 120, the average cost is 6.7.
After analyzing both total cost and average cost, we find that the average cost is decreased
when the total cost increases.

Here, capital 1 is ceteris paribus. In this graph, we see that when the number of labor
increases, the number of quantities increases. When labor is increased 0 to 1, quantity
increase 0 to 50. When the amount of labor increase 1 to 2 , quantity increase 50 to 90. When
the amount of labour increase 2 to 3, quantity increase 90 to 120. If we observe the graph
very carefully, then we able to find that the quantity is increasing very slowly. It means the
factory area of business Z is very small, and that’s why their labor does not utilize their
resources properly.
Now business Z is considering to moving to a larger factory. That’s why business Z will get
some advantages. Besides that, it has to face some disadvantages.

Advantages for business Z: For the reason of the small factory, the labor of business z
didn’t use their equipment, materials, and resources effectively. And that’s why the labor’s of
business z did not produce more product. But now business Z is considering to moving in a
large factory. Now, the labor of business Z will get more space to utilize their resources
properly and produce more products.

Disadvantages for business Z: The main disadvantage of the large factory their flexibility
rate is very. So in the large factory business, Z does not change their strategy quickly if any
unavoidable problem comes. Besides that, now, for the reason of large company business, Z
will need more capital to increase their equipment and materials. 

Question 4 (3 marks)

In Ch 19 we have learned about marginal concepts and average concepts which can be
applied in many diverse situations.

A student wants to apply the marginal concept and average concept to the coronavirus
situation. Discuss in detail how the concepts can be applied to the coronavirus situation.
What do the concepts mean? What formula can we use to calculate them?

If we look at the present coronavirus situation, people are concern about their health. If I say
specifically before coming coronavirus, people did not wear a mask, but people wear a mask
to keep safe them from a virus after coming coronavirus. So before coronavirus company
produced fix amount of masks. And we come to know from the definition of marginal
concept if we do something additional, then we get the additional output. So we could not use
the marginal concept for a fixed amount of mask. We could use this concept for the mask,
which is additionally produced in this coronavirus. For example:
Marginal Cost: In this coronavirus situation, a company produces an additional mask that
carries an additional product cost. And by using the marginal cost formula, students will be
able to calculate the additional cost for producing additional masks. The marginal cost
formula is: ∆COST/ ∆Q

Marginal Product of Labour: For additional production of mask company uses additional

labor. So by using marginal product of labor formula, students will be able to calculate the
amount of additional labor that needed to produce additional masks. And the formula is:
∆Q / ∆L

Marginal Revenue: By selling additional mask company is making additional revenue. And
by using this marginal revenue formula, a student could calculate the amount of additional
revenue that the company makes by selling additional masks. And the formula is: ∆revenue /
∆Q

On the other hand, in the average concept, a student will able to know the per-unit production
of the mask from the total amount of mask. For example:

Average cost: By using the average cost formula, students could calculate the per-unit cost
of the mask. And the formula is: C / Q

Average product of labor: By using the average product of labor formula, students able to
calculate the amount of per-unit labor from the total labor. And the formula is: Q / L

Average revenue: By using the average revenue formula, students could calculate the
amount of per-unit revenue of the mask from the total revenue. And the formula is:
Revenue / Q

Question 5 (7 marks)
In Bangladesh tobacco companies pay a higher tax rate as compared to other
companies. Explain why this is the case using the concepts of Ch 17. Your answer
should include well-labeled demand-supply diagrams.

Normally government imposes a higher tax on inelastic products for revenue income because
inelastic products have no substitutes. After imposing a higher tax on the product price, the
customer has to pay the higher price to buy the product because the product has no
alternative. Sometimes government imposes a higher tax on some products to discourage its
users from buying, example-tobacco.
Tobacco is an inelastic product because it has no substitute. This product is harmful to human
health. The govt. imposes higher tax on tobacco company for the following reasons:
1.To earn more revenue due to the reason of its inelastic characteristics
2.To discourage the users for its threat to human health.

In this graph, the first equilibrium point means before taxation is B. But after taxation, the
supply curve shifted towards the left means it shifted from S to S` because the quantity
demanded by the consumers remains unchanged by the increased price, which indicates that
it is inelastic demand. For the reason of that, created a new equilibrium point which is A.