Question 1

Quantity of labour	Total product
(workers)	(weights per day)	TFC	TVC	TC	AFC	AVC	ATC	MC
0	0				xx	xx	xx	xx
1	5
2	15
3	35
4	50
5	60
6	65

(1a) Use the information provided to complete the above table. In the table, TFCis the total fixed cost, TVCis the total variable cost, TCis the total cost, AFCis the average fixed cost, AVCis the average variable cost, ATCis the average total cost, and MCis the marginal cost.

(1b) When the quantity of labour increases from 5 to 6, does the average total cost (ATC) increase or decrease? Can the change in ATC be explained by the increase or decrease in the marginal cost (MC)? Explain.

Question 2

An ECON student argues: 'The economic model of a perfectly competitive market is very unrealistic because it predicts that firms in a perfectly competitive market earn zero profits in the long run. However, in reality, no firm would stay in business if it earned no profits.' Do you agree or disagree? Explain.

Question 3

Suppose Marcus produces 1,200 slices of pizza per week in a perfectly competitive market. Given the market price of pizzas is $40 per slice, the variable cost is $30,000 and the fixed cost is $24,000. Is Marcus making a profit or a loss? Should Marcus keep the restaurant open or shut down the restaurant in the short run? Explain.

Question 4

The market for apples is perfectly competitive. Orchards growing apples are now making losses.

(4a) Draw two diagrams, side by side, to illustrate the present situation for the typical firm (i.e. the typical orchard) and in the market. Briefly explain the diagrams.

(4b) Assuming there is no change in demand and the firms' cost curves, explain what will happen to the price, output and profits of the typical firm in the long run. Explain with the diagrams in part (a).