Question

9. Are the following statements true or false? Explain your answers. a) "Isoquants are always L-shaped." b) "A bandwagon effect is an example of negative network externality in which a consumer wishes to possess a go in part because others do." c) "The demand for washing machines is more elastic in the short run than the long run." 10.a) Complete the following table: Quantity of Variable Total Input Output Marginal Product of Variable Input Average Product of Variable Input 30 b) Draw the marginal product of variable input and comment on its shape.

Answer 1

Solutions:

9(a). The statement is false.

Reason: Isoquant shows various combination of inputs usually labour and capital , to produce a given level of output. the shape of an isoquant can be a rectangular hyperbola as well as a L-shaped curve (representing a fixed proportion production function). Thus the marginal rate of technical substitution between the inputs (ratio of change in one input to the other) is not always fixed.

9(b). The statement is false.

Reason: In cases where an individual's utility from possessing a good depends on other peoples consumption of that good. Thus if the number of people demanding for a particular good increases, as more people are attracted towards that good either due to good marketing strategies or due to a fashion trend, then the overall demand for the good increases due to positive externality arising from every additional consumption.

9(c). The statement is True.

Reason: The demand for washing machines are highly reactive to any change in it's price in the short-run than in the long-run. This is so because washing machines are durable goods.

10(a).

Qty of Variable Input	Total Output	Marginal Product of Variable Input	Average Product of Variable Input
0	0	0	0
1	50	50	50
2	80	30	40
3	90	10	45
4	96	6	24
5	100	4	20
6	96	-4	16

  10(b).

Marginal Product Curve Marginal Product of Variable input Units of Variable Input

Comment: The Marginal product of the variable input as shown in the above figure is the highest at the first unit of input, as additional units of input are employed, the marginal product of variable input declines and finally becomes negative at 6th addition to the total number of variable inputs. This is a feature of law of variable proportion.