Micro Lecture 10/11/12 ( Consumption-Leisure Model + Short-Run Production and Costs + Revenue and Profit Maximisation)

Question 1

What is the income equation in the consumption-leisure model?

Answer 1

Y = w(T - L)

Where:

Y is income
T is total time
L is leisure
w is the wage rate

Question 2

What is the backward-bending labour supply curve?

Answer 2

At higher wages, the income effect dominates, reducing labour supply.

Question 3

What is the law of diminishing returns?

Answer 3

Adding more of a variable factor to a fixed factor eventually leads to smaller increases in output.

Question 4

What are the key production metrics?

Answer 4

Total Product (TP): Total output from all inputs.
Marginal Product (MP): MP = ΔTP / ΔL
Average Product (AP): AP = TP / L

Question 5

What is marginal cost (MC)?

Answer 5

The additional cost of producing one more unit of output.
Formula: MC = ΔTC / ΔQ

Question 6

What is the profit maximization rule?

Answer 6

Profits are maximized where Marginal Revenue (MR) = Marginal Cost (MC).

Question 7

What is the shut-down rule?

Answer 7

Short Run: Shut down if P < AVC
Long Run: Shut down if P < ATC

Question 8

What is the formula for profit?

Answer 8

π = TR - TC

Question 9

What is the formula for marginal revenue (MR)?

Answer 9

MR = ΔTR / ΔQ