Managerial Economics in Agribusiness – Worksheet 2021

1. Define the concept of scarcity. Explain the significance of this concept in relation to the
concept of opportunity cost. Discuss why the concept of scarcity is central to the study of
economics.

Scarcity ;means Lack of enough resources to satisfy all the needs and wants of a specified
group of people. Since resources are scarce, it follows that the goods and services we produce
must also be limited.

The significance of this concept in relation to the concept of opportunity cost

A good is scare if the choice one alternative requires that another be give up. the existence of
alternative uses forces us to make choice .the opportunity cost of any choice is the value of the
best alternative forgone in making it.

Discuss why the concept of scarcity is central to the study of economics.

Because scarcity is a situation in which unlimited wants excess the limited resource available to
fulfill those wants .since resource are limited with respect to our wants we have to make
choice .the idea of scarcity is central to the study of economics because is the study of choice
people to make to attain their goals.
2. Explain how managerial economics is similar to and different from microeconomics. Discuss
the scope of managerial economics and how it’s important in agribusiness economics.

Is similar to both are encourage the use of quantitative methods to analyzes economic data.

Differences between managerial economics and micro economics

Managerial Economics: the use of economic analysis to make business decisions involving the
best use (allocation) of an organization’s scarce resources

It is also defined as the application of economic theory and decision science tools to find the
optimal solution to managerial decision problems

It uses analytical tools and a set of concepts to provide effective ways of thinking about decision
problem

Microeconomics focuses on individual economic behavior (individual households) and firms

and their interaction in the market. E.g., how consumers respond to changes in prices and
income, how businesses decide on employment and sales

The scope of managerial economics; the scope of ME to managerial issues is more limited to
microeconomics

How it’s important in agribusiness economics

Since Agribusiness is part of the economy devoted to the production, processing, and distribution
of food, including the financial institutions that fund these activities;

 It provides a framework for evaluating whether resources are being allocated efficiently
within the firm or not.
 It helps to identify the alternative means of achieving the given objectives of an
agribusiness
 It helps to select the alternative that accomplishes the objective in the most resource
efficient manner(e.g. example to determine if profit could be increased by substitute labor
(variable cost) by technology (fixed cost)
3. Economic optimization involves maximizing an objective function, which may or may not be
subject to side constraints. Do you agree with this statement? If not, why not?

 Yes I agree because economic decision analysis involves determining the action the best
achieves a desired goal or objectives .this means finding the action that optimizes that is
maximizes or minimizes the value of an objective function
4. The market supply and demand equations are given by: QD =200 -50P and QS =-40 + 30P;

a. Determine equilibrium price and quantity. Show graphically

b. If demand changes QD =300-50P and supply changes QS =-20 +30P; calculate market
clearing price and quantity

c. For b, show the changes graphically and the new equilibrium

d. If only demand changes to QD=300-50P, show the new equilibrium graphically and
indicate the amount of shortage
5. Discuss change in demand and change in quantity demand. Substantiate your discussion using
graphs. Why the slop of the demand curve is downward slopping?

Change in demand represents a shift in consumer desire to purchase a particular goods or

service

change in quantity demand refers to change in the quantity purchase due to increase or
decrease in the price of products

Why the slop of the demand curve is downward slopping

 Because quantity demanded is negatively related to price.

6. Define and give an example of each of the following supply terms and concepts. Illustrate
diagrammatically a change in each.

 Supply the amount of a commodity that sellers are able to and willing to offer for sell at
different prices. Examples when supply of product goes up, the price of product goes
down and demand for the product can rise because it costs loss
 Quantity supplied of any good is the amount that sellers are willing and able to sell
 Market supply curve is the lateral summation of the individual supply curves of all the
producers in the market. examples if the price of corn increase farmers are unable to
immediately grow more corn
 Technology is a science or knowledge put in to practical use to solve problems or in
event useful tool examples internet

Change in Supply

This is a situation which is due to a variation in any determinant of supply other than
commodity/service own price and it is described by a shift in the supply curve for the commodity

or service.
Figure: An increase in supply

Figure: A decrease in supply

Change in Quantity Supplied

This is a situation which is due to a rise or fall in the price of a commodity/service and it is
described by a movement along the supply curve for the commodity/service.

Figure: Movement induced by an increase in commodity’s own price

Figure: Movement due to a decrease in commodity’s own price

Change in Supply

This is a situation which is due to a variation in any determinant of supply other than
commodity/service own price and it is described by a shift in the supply curve for the commodity
or service.

Figure: An increase in supply

 7. Suppose that the demand equations for heart surgery and cosmetic surgery are both linear.
The demand for heart surgery is more price inelastic than the demand for cosmetic surgery. Do
you agree? Explain.

Yes, I agree because of when we go different hospital almost the price is constant for heart
surgery than cosmetics Surgery because cosmetics surgery is luxury one.

8. Explain the following production terms and concepts;

a. Short run and long run production

Short run production is time period over which the firm is not able to change the quantities of
all inputs. It refers to a production cycle in which at least one factor is fixed.

Long run production is time period where all inputs can be varied. Examples labor, land,
capital, entrepreneurial effort. It indicates the time period, over which the firm can change the
quantities of all the inputs. All inputs are variable and Output changed by varying usage of all
inputs

b. Production function physical relationship between inputs or resources to produce output

c. The law of diminishing marginal product

Diminishing MP: Holding all other inputs fixed, as we use more and more of an input,
eventually the MP will start decreasing, i.e., The returns to increasing the input eventually start
decreasing

9. Suppose that output is a function of labor and capital. Assume that labor is the variable input
and capital is the fixed input. Explain the law of diminishing marginal product. How is the law of
diminishing marginal product reflected in the total product of labor curve?

Diminishing MP: Holding all other inputs fixed, as we use more and more of an input,
eventually the MP will start decreasing, i.e., The returns to increasing the input eventually start
decreasing

The law of diminishing marginal productivity involves marginal increases in production return
per unit produced. It can also be known as the law of diminishing marginal product or the law of
diminishing marginal return. In general, it aligns with most economic theories using marginal
analysis. Marginal increases are commonly found in economics, showing a diminishing rate of
satisfaction or gain obtained from additional units of consumption or production.
The law of diminishing marginal productivity suggests that managers find a marginally
diminishing rate of production return per unit produced after making advantageous adjustments
to inputs driving production. When mathematically graphed this creates a concave chart showing
total production return gained from aggregate unit production gradually increasing until leveling
off and potentially starting to fall.

Different than some other economic laws, the law of diminishing marginal productivity involves
marginal product calculations that can usually be relatively easy to quantify. Companies may
choose to alter various inputs in the factors of production for various reasons, many of which are
focused on costs. In some situations, it may be more cost-efficient to alter the inputs of one
variable while keeping others constant. However, in practice, all changes to input variables
require close analysis. The law of diminishing marginal productivity says that these changes to
inputs will have a marginally positive effect on outputs. Thus, each additional unit produced will
report a marginally smaller production return than the unit before it as production goes on.

The law of diminishing marginal productivity is also known as the law of diminishing marginal
returns. Marginal productivity or marginal product refers to the extra output, return, or profit
yielded per unit by advantages from production inputs. Inputs can include things like labor and
raw materials. The law of diminishing marginal returns states that when an advantage is gained
in a factor of production, the marginal productivity will typically diminish as production
increases. This means that the cost advantage usually diminishes for each additional unit of
output produced.

10. Discuss the three stages of production. Use graph to support your analysis

Stages of production
Stage I: Stage of Increasing Returns:

• AP is increasing and the MP is greater than the AP. the TP curve Stage 1 exist.

• AP is increasing, but MP is increasing first up to point then decreasing.

Zero level of input to APP max – APP increasing, – MPP > APP, and – TPP increasing

Stage II: Stage of Decreasing Returns

 • Both AP and MP is decreasing. But MP is positive.

APP max to MPP 0 – APP decreasing, – MPP < APP, and – TPP increasing

Stage III: Stage of Negative Returns

• TP is diminishing and the MP is negative

MPP<0 – TPP decreasing

11. When the average product of labor is equal to the marginal product of labor, the marginal
product of labor is maximized. Do you agree? Explain.

Yes I agree because

The general rule is that a firm maximizes profit by producing that quantity of output where
marginal revenue equals marginal costs. The profit maximization issue can also be approached
from the input side. That is, what is the profit maximizing usage of the variable input? To
maximize profits the firm should increase usage "up to the point where the input’s marginal
revenue product equals its marginal costs". So, mathematically the profit maximizing rule is
MRPL = MCL. The marginal profit per unit of labor equals the marginal revenue product of
labor minus the marginal cost of labor or MπL = MRPL − MCLA firm maximizes profits where
MπL = 0.

12. What is the relationship between the average product of labor and the marginal product of
labor?

The average product of labor is the total product of labor divided by the number of units of labor
employed, or Q/L. The average product of labor is a common measure of labor productivity. The
APL curve is shaped like an inverted “u”. At low production levels the APL tends to increase as
additional labor is added. The primary reason for the increase is specialization and division of
labor. At the point the APL reaches its maximum value APL equals the MPL Beyond this point
the APL falls.

During the early stages of production MPL is greater than APL. When the MPL is above the
APL the APL will increase. Eventually the MPL reaches it maximum value at the point of
diminishing returns. Beyond this point MPL will decrease. However, at the point of diminishing
returns the MPL is still above the APL and APL will continue to increase until MPL equals APL.
When MPL is below APL, APL will decrease.

Graphically, the APL curve can be derived from the total product curve by drawing secants from
the origin that intersect (cut) the total product curve. The slope of the secant line equals the
average product of labor, where the slope = dQ/dL.The slope of the curve at each intersection
marks a point on the average product curve. The slope increases until the line reaches a point of
tangency with the total product curve. This point marks the maximum average product of labor.
It also marks the point where MPL (which is the slope of the total product curve equals the APL
(the slope of the secant) Beyond this point the slope of the secants become progressively smaller
as APL declines. The MPL curve intersects the APL curve from above at the maximum point of
the APL curve. Thereafter, the MPL curve is below the APL curve.

13. Suppose that a firm’s short-run production function has been estimated as Q = 6L - 0.4L2

a. Calculate output maximizing level of L

b. Graph the TPP for values L = 0 to L = 10

c. What’s the MPP of labor equation? Graph it for values L = 0 to L = 10

d. What’s the APP of labor equation? Graph it for values L = 0 to L = 10

14. The average product of labor is given by the equation; APL = 600 + 200L-L2

a. What is the equation for the total product of labor (TPPL)?

b. What is the equation for the marginal product of labor (MPPL)?

c. At what level of labor usage is APPL = MPPL?

15. Marginal cost is the cost of producing the “last” unit of output. Do you agree? If not, then
why not.

16. The total cost equation of a firm is given by the equation TC = 125,000 + 100Q + 0.5Q2

a. Determine the output level that minimizes average total cost

. b. Calculate ATC and MC at the level of output that will minimize ATC.

c. What is the firm’s total fixed cost?

d. What is the equation for the firm’s total variable cost (TVC)?

e. What is the equation for the firm’s average total cost (ATC)?

f. What is the equation for the firm’s marginal cost (MC)?

17. Suppose that the marginal cost function of a firm is MC (Q) = Q2 - 4Q + 5; and the firm’s
total fixed cost is 10.

a. Determine the firm’s total cost function.

b. What is the firm’s total cost of production at Q = 3?

18. Define market structure. Characterize the four main types of market structures. Which one is
best to optimize societal welfare? Why?

Perfect Competition describes a market structure where competition is at its greatest possible
level.
Characteristics:

Large number of firms

 Products are homogenous (identical) – consumer has no reason to express a preference

for any firm
 Freedom of entry and exit into and out of thme industry Firms are price takers – have no
control over the price they
 Each producer supplies a very small proportion of total industry Output charge for their
product
 Consumers and producers have perfect knowledge about the market .

Monopolistic or Imperfect Competition

Where the conditions of perfect competition do not hold, ‘imperfect competition’ will exist
Varying degrees of imperfection give rise to varying market structures Monopolistic competition
is one of these – not to be confused with monopoly

Characteristics:

 Large number of firms in the industry

 May have some element of control over price duee to
 the fact that they are able to differentiate their product in some way from their rivals –
products are therefore close, but not perfect, substitutes
 Entry and exit from the industry is relatively easy –
 Consumer and producer knowledge imperfect few barriers to entry and exit

Oligopoly

Competition between the few

May be a large number of firms in the industry but the industry is dominated by a small number
of very large producers Features of an oligopolistic market structure:

Price may be relatively stable across the industry.

Potential for collusion

 Behaviour of firms affected by what they believe their rivals might do – interdependence
of firms Branding and brand loyalty may be a potent source of Competitive advantage
 Non-price competition may be prevalent could occur over large range of output
 High barriers to entry
Duopoly

Market structure where the industry is dominated by two large producers

Collusion may be a possible feature

 Price leadership by the larger of the two firms may exist –

 The smaller firm follows the price lead of the larger one Highly interdependent
 High barriers to entry
 In reality, local duopolies may exist

Monopoly

Pure monopoly – where only one producer exists in the industry

 In reality, rarely exists – always some form of Substitute available!

 Monopoly exists, therefore, where one firm dominates the market
 Use term ‘monopoly power’ with care! Summary of characteristics of firms exercising
monopoly power:
 Price – could be deemed too high, may be set to destroy competition (destroyer or
predatory pricing), price discrimination possible.
 Efficiency – could be inefficient due to lack of competition (X- inefficiency) or…
 could be higher due to availability of high profits

19. Firms in perfectly competitive industries may be described as price takers. What are the
implications of this observation for the price and output decisions of profit-maximizing firms?

A perfectly competitive firm has only one major decision to make—namely, what quantity to
produce. To understand why this is so, consider a different way of writing out the basic
definition of profit:

Since a perfectly competitive firm must accept the price for its output as determined by the
product’s market demand and supply, it cannot choose the price it charges. This is already
determined in the profit equation, and so the perfectly competitive firm can sell any number of
units at exactly the same price. It implies that the firm faces a perfectly elastic demand curve for
its product: buyers are willing to buy any number of units of output from the firm at the market
price. When the perfectly competitive firm chooses what quantity to produce, then this quantity
—along with the prices prevailing in the market for output and inputs—will determine the firm’s
total revenue, total costs, and ultimately, level of profits.
20. To maximize total revenue, the monopolist must charge the highest price possible. Do you
agree? Explain.

Yes I agree

The marginal cost curves faced by monopolies are similar to those faced by perfectly competitive
firms. Most will have low marginal costs at low levels of production, reflecting the fact that
firms can take advantage of efficiency opportunities as they begin to grow. Marginal costs get
higher as output increases. When production reaches 50 pizzas per hour, however, it may be
difficult to grow without investing a lot of money in more skilled employees or more high-tech
ovens. This trend is reflected in the upward-sloping portion of the marginal cost curve.

The marginal revenue curve for monopolies, however, is quite different than the marginal
revenue curve for competitive firms. While competitive firms experience marginal revenue that
is equal to price – represented graphically by a horizontal line – monopolies have downward-
sloping marginal revenue curves that are different than the good’s price.

21. Define market failure using examples.

A situation in which the free-market system fails to satisfy society’s wants (When the invisible
hand doesn’t work) Markets do not efficiently bring about the allocation of resources.

Market Failure Examples

Pollution, air, water, soil

Traffic congestion

Deforestation and loss of biodiversity

Health problems associated with consumption of tobacco, alcohol and illicit drugs

Depleted fish stocks

Global Warming

22. Describe the main sources of market failure and discuss how these factors cause market
failures.

Sources of market failure

 Imperfect competition (Lack of competition, oligopoly, monopoly)
 Public goods (non-excludable, non-rival)
 Existence of externalities (+ve, -ve)
 Existence of income inequality
 Lack of infrastructure
 Inflation and unemployment

Market imperfections

 Market Power/Monopoly
 Inefficiencies
 Higher prices
 Incomplete Information
 Imperfect knowledge of the market can also cause market failure
The lack of fully informed decision making might lead to the market failure

Public goods Private Goods:

 Rival
 Depletable
 Excludable Public Goods
 Non–Rival
 Non–Depletable
 Non–Excludable
 Zero Marginal Cost

Public Goods and Market Failure ;An individual can’t pay for public goods as others can get the
benefits from consumption without paying which is the failure of market mechanism.
Private companies will not supply public goods as they don’t make an economic profit on them.
Thu ,public goods are only supplied by the

Externalities

 A consequence of an economic activities that are experienced by un related third parties.

 Factors whose benefits (external economies) and costs (external diseconomies) are not
reflected in the market price of goods and services.
 Externalities are a loss or gain in the welfare of one party resulting from an activity of
another party, without being any compensation for these can lead to market failure if the
pricing mechanism fails to a
 Inequalities
 In market economies, an individual’s ability to consume goods and services is dependent
on their income/wealth.
 An uneven distribution of income/ wealth with in an economy can result in an un
satisfactory allocation of resources and therefore market failure prevail.

23. Explain how to correct and manage market failures. What is the roles of the government and
Government’s Response to Market Failure Roles o f the Government:

In general the role of government for the market is

Peace and securties

Easy taxes

Tolerant amount of justice

Regulatory role

Allocative role

Distributive role

Stabilization role all institutions

Regulatory response to structure failure

 Control over industry structure–by antitrust policies, for instance, telecom industry, diary
industry, etc
 Direct control–by fixing the quantity and price of the products and services.
 Subsidy :the government also respond to the market failure by providing subsidies to the
private business firm.
 It may be two types:
 Direct subsidy like: Special tax treatment , Direct payment etc
 Indirect Subsidy like construction of road

Regulator role

Operating control

 The control impose by the government in order to limit the activities of the business firm.
Control on environment pollution
 Control on food products
 Price control
 Industrial work condition/ Quality of Work Life
 Protection of minority groups

Allocative Role

 The government must determine how some resources are allocated.

 Collective goods such as roads, education and health. Distributive Role
 The free market outcome results in an unfair distribution of income, so the will intervene
to assure everyone has a sufficient income.
 They do this through benefits, state housing and educational courses. Stabilization Role
 The government intervenes in the market to ensure there is steady growth.
 They do this through monetary and fiscal policy.

Government Intervention

 Taxes– a compulsory payment to the government.

 Subsidy– a payment by government to firms to keep costs low.
 Transfer payments–a payment mad