NSS Exploring Economics 2 (3rd Edition)

Answers to Exercises

Multiple Choice Questions

1. A
In the short run, some firms may have to employ more machines and equipment to raise
their output, e.g., sewing machines in a factory and dishes in a restaurant. In these cases,
the machines and equipment belong to variable factors.
2. B
3. C
Customers are not a factor of production.
4. B
According to the table, MP drops after the 3rd unit of labour is employed.
Labour (units) AP TP MP
1 2 2 (= 2 × 1) 2 (= 2 – 0)
2 5 10 (= 5 × 2) 8 (= 10 – 2)
3 8 24 (= 8 × 3) 14 (= 24 – 10)
4 9 36 (= 9 × 4) 8 (= 36 – 24)
5 8 40 (= 8 × 5) 4 (= 40 – 36)

5. C
Machines Labour Total product
MP
(units) (units) (units)
2 10 10 –
2 11 24 14
2 12 42 18
2 13 62 20
2 14 X < 20
If the law of diminishing marginal returns applies to the firm, the MP of the 14th unit of
labour must be smaller than 20. Hence,
X – 62 < 20
X < 82
6. A
Negative MP implies that TP decreases.

NSS Exploring Economics 2 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
7. C
MP drops when the employment of labour increases from 50 units to 55 units.
Number of Average working
Labour TP MP
workers hours of workers
5 8 40 (= 5 × 8) 2,000 ─
5 9 45 (= 5 × 9) 2,200 200 (= 2,200 – 2,000)
5 10 50 (= 5 × 10) 2,300 100 (= 2,300 –2,300)
5 11 55 (= 5 × 11) 2,350 50 (= 2,350 – 2,300)
8. A
Option A is correct. Since the total cost is $4 at zero output, the firm has fixed factors and
is operating in the short run.
Option B is incorrect. We cannot draw the conclusion, since we do not have information
about the marginal product.
Option C is incorrect. The average variable cost at the second unit of output is ($16 – $4)
÷ 2 = $6.
Option D is incorrect. The firm is operating in the short run. We cannot find the optimal
scale from the given data.
9. B
Option A is incorrect. To borrow more money, the total amount of interest paid is larger
but the interest rate and the LRAC may not increase.
Option C is incorrect. The statement describes the meaning of diseconomies of scale but
it does not account for that.
Option D is incorrect. It is a source of external diseconomies of scale, not internal.
10. B
Capital Labour Total output Total cost
AC
(units) (units) (units) ($)
1 1 5 100 20
2 2 15 200 13
3 3 30 300 10
4 4 50 400 8
Option B is correct. The firm enjoys economies of scale because the average cost
decreases when the production scale increases.
Option C is incorrect. As the average cost may continue to fall, the optimal scale of
production may be greater than 50 units of output.
Option D is incorrect. The law does not apply as the data shows the long run situation.

NSS Exploring Economics 2 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
p.134
Short Questions
1.
a. Short run is the period over which some factors of production are variable and some are
fixed. (1 mark)
Long run is the period over which all factors of production are variable. (1 mark)
b. Their difference is that fixed factors exist in the short run but not in the long run.
(2 marks)

2.
a. Examples of variable factors:
water, electricity, food, drinks, snacks, part-time labour, etc.
(Any THREE of the above. 1 mark × 3 = 3 marks)
Their quantities employed are zero during the Lunar New Year Holiday. (1 mark)
b. Examples of fixed costs:
business registration fees, the shop’s rent, loan interest and monthly wages independent of
output, etc.
(Any TWO of the above. 1 mark × 2 = 2 marks)
This is because adjusting the employment of fixed factors with output is too costly. For
example, it is unwise to close the tuck shop and sell all the equipment before the holiday
and open the tuck shop and buy the equipment again after the holiday. (2 marks)

3.
a. Possible reasons for a decrease in average cost:
● Chan’s logistics company can spread its advertising costs over a larger output.
● Chan’s logistics company can get a larger discount when buying vehicles, equipment
and fuel in bulk.
● Chan’s logistics company can apply a wider scope of specialisation among managers
and attract better managers.
● Chan’s logistics company can utilise its fleet of vehicles more fully.
● Chan’s logistics company can bargain for a lower borrowing rate.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)
b. Possible reasons for suffering external diseconomies of scale:
● Higher cost of recruiting drivers and transport workers as the competition and demand
for experienced drivers and transport workers increase.
● Higher cost of marketing as the existing market becomes saturated.
● Higher cost of buying backup services as the demand for these services increases.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

NSS Exploring Economics 2 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
4.
Possible reasons for enjoying external economies of scale:
● Lower cost of recruiting and training workers as more experienced workers are available
in the manufacturing industry.
● Lower cost of marketing and promotion as more people know about the expanding
manufacturing industry in Vietnam.
● Lower cost of buying backup services as more related businesses will be developed.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

p.134
Structured Questions
1.
a.
Total Average Marginal Total Total
Capital Labour Total Average
product product product fixed variable
(units) (units) cost ($) cost ($)
(units) (units) (units) cost ($) cost ($)
4 1 2 2 2 40 20 60 30
4 2 5 2.5 3 40 40 80 16
4 3 10 3.3 5 40 60 100 10
4 4 14 3.5 4 40 80 120 8.6
4 5 14 2.8 0 40 100 140 10
4 6 12 2 -2 40 120 160 13.3
(1 mark for each column; deduct 0.5 marks for each mistake; a maximum of 1 mark can be
deducted for each column.)
b. Short run, (1 mark)
because the firm employs a fixed factor, capital, of which the quantity employed is fixed
at 4 units, independent of output. (1 mark)
c. When labour increases from 3 units to 4 units, the marginal product falls from 5 units to 4
units. Hence, the law of diminishing marginal returns applies to the firm. (3 marks)

NSS Exploring Economics 2 (3rd Edition) 4 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
2.
a. The law of diminishing marginal returns states that when more units of a variable factor
are added continuously to a given quantity of fixed factors, the marginal product of the
variable factor will eventually decrease, ceteris paribus (including technology).
(3 marks)
b. The table below summarises the marginal product of workers. Assume that the total
product of 30 workers is 200 units.
The worker employed Total product (units) Marginal product (units)
(= 30th – number of absence) (= 200 – Decrease in output) (MPn = TPn – TPn – 1)
30th 200 (= 200 – 0) 20 (= 200 – 180)
th th
29 (= 30 – 1) 180 (= 200 – 20) 25 (= 180 – 155)
28th (= 30th – 2) 155 (= 200 – 45) 30 (= 155 – 125)
th th
27 (= 30 – 3) 125 (= 200 – 75) 40 (= 125 – 85)
26th (= 30th – 4) 85 (= 200 – 115) 30 (= 85 – 55)
25th (= 30th – 5) 55 (= 200 – 145) –
(2 marks; deduct 0.5 marks for each mistake.)
When the number of workers increases from 27 to 28, the marginal product decreases
from 40 to 30 units. Hence, the law is applicable to the factory. (2 marks)

3.
a. i.
Total product Change in total
Capital (units) Labour (units)
(units) product (units)
1 1 10 10 (= 10 – 0)
2 2 25 15 (= 25 – 10)
3 3 41 16 (= 41 – 25)
4 4 50 9 (= 50 – 41)
(0.5 marks for each correct answer)
ii. No, (1 mark)
because the firm is operating in the long run with all factors being variable. (1 mark)

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Answers to Exercises (Chapter 11)
b. i.
Total product (units) Total cost ($) Average cost ($)
10 100 10 (= 100 ÷ 10)
25 200 8 (= 200 ÷ 25)
41 300 7.3 (= 300 ÷ 41)
50 400 8 (= 400 ÷ 50)
(0.5 marks for each correct answer)
ii. The average cost decreases from $10 to $7.3 when the scale of production increases
from 10 units to 41 units of output. (1 mark)
The average cost increases from $7.3 to $8 when the scale of production further
increases from 41 units to 50 units of output. (1 mark)
Hence, the data illustrate economies of scale and diseconomies of scale, respectively.
(2 marks)

NSS Exploring Economics 2 (3rd Edition) 6 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)