Lecture 5- Optimisation

Question 1

How do confirm that the law of diminishing marginal returns holds?

Answer 1

Show that dMC/dq is greater than 0- this is because it is assumed that with law of diminishing marginal returns, as more inputs (FOP) are added to a fixed factor, they add less and less to total output AND add to costs mainly (due to inefficiencies) … ATC, AVC AND MC curves ⬆️

Question 2

What must you remember to do when you differentiate and find solutions for the first order condition (FOC)?

Answer 2

Be ready to double differentiate and show that they are either maximums or minimums
A question may assume that the point is either a maximum or minimum but you must show what it already implies

Question 3

What are the 2 things you must remember when writing your maths solutions?

Answer 3

1) Have double lined arrow along the left side of your working out- work downwards and avoid across and add the arrows before every line of working if the solution is connected
2) Also remember to add FOC (first order condition) when differentiating once and SOC (second order condition) when differentiating twice