1. FIRMS HOUSEHOLDS QO P D S QfQf PfPf Factor market QO P D S QgQg PgPg Goods market Factor services Goods Factor demand Factor supply Goods supply Goods demand Rs

2. x W1W1 Substitution effect dominates Income effect dominates H1H1 Wage Hours worked O Backward-bending labor supply curve.

3. x Output O Q of Labor MPP L Diminishing returns

4. x Rs. O Q of Labor MRP L = VMP L W1W1 Q1Q1 X W = MC L Firm’s demand curve MC 2 MC L MC 3 MC 4 MC 0 Q2Q2 Q0Q0 Q3Q3 Q4Q4

5. Rs. O MRP L = VMP L W1W1 Q1Q1 W = MC L Wages Surplus for firm QLQL Q0Q0

6. Rs. O MRP L Q1`Q1` W = MC L QLQL W1`W1` VMP L X Z Q2Q2 Y W 1 ``

7. Discounting Rate of discount = 10% The formula for discounting is as follows: X i (1+ r) i where PV is present value X i is earnings from the investment in the year i r is the rate of discount Σ is the sum over i, of the discounted earnings. PV = Σ i i

8. Present value of machine that generates Rs. 1,000 for four years and then sold as scrap for Rs. 1,000 at the end of year 4? 1,000 Year 1 Year 2 Year 3 Year 4 1,000 1.1 1,000 1.1 2,000 1.1 + ++ 909 8267511366 +++ = = Rs. 3852 432 = If machine costs less than this then Buy, otherwise don’t Buy. Net present value = PV – Purchase cost 1.1 1

9. Online economics course QTCMCAC 5050,000 1000 10050,000 500 15050,000 330 20050,000 250 50,000 200 30050,000 166 0 0 0 0 0 A typical information product

10. AC Costs Output MR D TC = 300 x 175 = 52,500 TR = 250 x 175 = 43,750 Loss = 50 x 175 =87,50 Profit or loss Loss A typical information product

11. AC Costs Output MR D Can information be profitable? O Yes! If the demand curve can be moved.