Average and Marginal Cost, and Average and Marginal Revenue - Assignment Example

? Economics for Business: Individual Portfolio of the Institute Appears Here Appears Here Total Word Length: Question a) Average and marginal cost, and average and marginal revenue in the given scenario is not one, rather varies according to the production level (Mankiw, 1998). Therefore, Average and marginal cost, and average and marginal revenue are calculated for each production level and tabulated below: Average and Marginal Cost Volume Total Costs Average Cost Marginal Cost 1 13 13.0 12 2 24 12.0 11 3 33 11.0 9 4 40 10.0 7 5 50 10.0 10 6 66 11.0 16 7 94 13.4 28 8 104 13.0 10 9 126 14.0 22 10 150 15.0 24 Average and Marginal Revenue Volume Total Revenue Average Revenue Marginal Revenue 1 27 27.0 27 2 53 26.5 26 3 78 26.0 25 4 102 25.5 24 5 125 25.0 23 6 145 24.2 20 7 168 24.0 23 8 188 23.5 20 9 207 23.0 19 10 225 22.5 18 b) Average and Marginal Costs Average and Marginal Revenues The above mentioned analysis shows that the lowest average cost corresponds to the level at which lowest marginal cost of production is reached by the production system. That is production output of 4 units. On the other hand, average revenue and marginal revenue is a continuously decreasing figure. There is no optimum value for marginal revenue and average revenue. With respect to the given data, lowest value is reached at output level of 10 units. c) Total profit at the output level of 4 units = total revenue – total cost = $102 - $40 = $82 Total profit at the output level of 4 units = total revenue – total cost = $225 - $150 = $75 d) This firm is operating in a perfect competition. This is because the marginal revenue of the firm decreases steadily with the increase in output level (Mankiw, 1998). The firm is a price taker and it has to decrease its price to convince its customers to buy additional units of the product. Question 2 a) There were a number of economic factors which contributed to the recession of 2008-09 in the UK economy. The financial crisis of was triggered by a chain of default loans in US subprime market which lead to a crisis in financial institutions globally. This caused a fall in the stock markets and the collapse of several financial institutions. To avoid a systemic crisis, governments stepped in and save many banks which cause a crisis of public debt. Moreover, it caused a recession affecting entire Europe. Public finances were heavily used to solve this crisis (Barro, 2009). This crisis also lead to a sharp rise in oil prices and agricultural products. The exorbitant rise in prices of assets and the associated demand was seen as the consequence of a period of credit ease. With declining equity and housing prices, large banks in UK lost a lot of money and required public funds for bail out. Unemployment persisted in UK, large imbalances in current account balances remained (Mankiw, 1998). In 2008, prices of many commodities, including oil and agricultural products went quite high causing stagflation in UK and exacerbating financial crisis. b) Recovery during the financial crisis of 2008 was slowest among the three crisis. The fall in the index was greatest during the crisis and consequently recovery from the effects of recession took greatest amount of time. In fact, the index does not recover at all in the graph to levels prior to the crisis. c) UK economy didn’t perform well during the last quarter of 2011. The reason for this poor performance was the fact that stock market and financial industry didn’t gain pace after the crisis. Inflation continued to remain high, while unemployment figures didn’t improve. d) The growth predictions for UK economy for next year is hardly encouraging. Growth rate of the economy expected to be only 1%, while the unemployment rate is expected to rise further in 2012. Business activity has resumed but certainly not enough to predict a sizeable reduction in unemployment. If unemployment persists then households consume less, which could compromise a sustainable recovery of the UK economy. Question 3 a) The theory of comparative cost advantage is that the advantages of trade between two countries does not depend on the absolute cost of production, but on the relative costs of goods produced to each other (Barro, 2009). Therefore, the trade between two countries is always an advantage since between both trading partners, different production cost structures exists. Each country should specialize in the commodity that it can produce relatively (comparatively) cheaper. Thus, according to the theory of international trade and international division of labor, even for those countries an advantage that can produce all the goods at a lower cost than other countries. In reality, this can be applied primarily to commercial relations between high-and low-industrialized countries (Barro, 2009). The theory generally includes a call for a global free trade , the specialization is in the States on their comparative advantages to the benefit of all. A Comparative advantage is based on each barter or generally any trade. It says that a trade is always rewarding when the two parties have different cost structures. Each party should then focus on the production of that good that it can produce cheaper relative to the other party (Hall and Lieberman, 2010). Originally, the theory of comparative advantage for countries and trade between countries has been developed. The basic idea is the same for all exchange situations and reasons why specialization is paying off, among other things.  For Example: The table below shows the production possibilities of two countries. To simplify the example, we assume that both countries produce both apples and towels only and nothing else. The example is also true for many other goods. A country can now be a maximum of either 10 apples per hour or 15 sheets produce apples and country B either 12 or 30 sheets.  Possible production of countries per hour Country A Country B Apples 10 = 6 min / apple 12 = 5 min / apple Towels 15 = 4 min / cloth 30 = 2 min / cloth Both countries now require a bit of both products, so that they produce a mixture of both. Between the countries until no trading takes place. The following table shows how much countries are now producing as much per hour and will produce a total of:  Production of the country per hour Country A Country B Total Apples 6 8 14 Towels 6 10 16 Although B can produce more of everything, it pays to specialize in those countries and trading. The reason for this lies in the different opportunity costs . Country A must forego for the production of an apple to 1.5 wipes (15 wipes apples divided by 10). Country B must forego for the production of an apple on a lot more, being 2.5 wipes. By definition, has a trade by 2 countries are involved, each country has a comparative advantage in the product, in which the other country has a comparative disadvantage. It is therefore advantageous to both countries, if country A concentrates on the production of apples and country B produces fewer apples and more towels. This is seen in the next table:  Production of the countries with trade per hour Country A Country B Total Apples 10 4 14 Towels 0 20 20 There are now as before 14 apples per hour produced. The production of fabrics has been increased from 16 to 20 sheets per hour. So there are now a total of 4 sheets produced more than before without trading. The production increases came about only by exploiting comparative advantages by specialization.  b) Using the graphical evidence from the above mentioned figure, it is evident that there is a shift in the comparative advantage of UK economy. The economy is gaining a competitive advantage in service sectors in comparison to manufacturing or production sector. The balance of trade is shifting positively towards a positive figure in service segment while going towards a negative figure in manufacturing sector (Barro, 2009). The country fares well by importing goods from other countries like China, Germany, France and Italy and earning revenues by exporting its services to other countries. References Barro, R. (2009) Macroeconomics: A Modern Approach, New Jersey: Engage Learning. Deepashree, R. and Agarwal, V. (2007) Macroeconomics, Ohio: McGraw-Hill Publications. Hall, R. and Lieberman, M. (2010) Macroeconomics: Principles and Applications, Ohio: Engage Learning. Mankiw, G. (1998) Microeconomics, Florida: Elsevier Publication. Read More