ECS2606
Environmental
Economics
, ECS2606/201
1. SOLUTIONS TO ASSIGNMENT 01
Question 1
Explain and graphically illustrate how an improvement in technology could decrease the total cost
of production.
[10]
See Learning Unit 3, and pages 54-55 of the prescribed textbook.
• Technology refers to the productive capabilities of the methods and machines that are
employed in the production process.
• In the Environmental Economics, technologically change plays a significant role because of
its capability of providing ways to produce goods and services with fewer environmental side
effects.
• Furthermore, technologically change provides better ways of handling the quantities of
production residuals that remain.
• In a simple cost model, the technical change shifts the marginal cost curve downward. This
enables the firm to determine how much total production will be reduced because of
technological change.
• The technological progress makes it possible to produce a given increase in output at a
lower marginal cost, as it reduces total production cost.
• total annual cost of producing q* is equal to area b. Thus, the reduction in total cost made
possible by the technologically change is equal to area a.
MC1
MC2
R
a
b
• MC1 represents the firm’s marginal
q* cost curve before a technical improvement
• MC2 represents the firm’s marginal cost curveQafter a technical improvement.
• Consider the output level q*, with MC1, the total annual cost of production output q* is
represented by the area Figure
a+b, whereas after the reduction
1: Technological in the marginal cost to C2, the
Improvement
4
Environmental
Economics
, ECS2606/201
1. SOLUTIONS TO ASSIGNMENT 01
Question 1
Explain and graphically illustrate how an improvement in technology could decrease the total cost
of production.
[10]
See Learning Unit 3, and pages 54-55 of the prescribed textbook.
• Technology refers to the productive capabilities of the methods and machines that are
employed in the production process.
• In the Environmental Economics, technologically change plays a significant role because of
its capability of providing ways to produce goods and services with fewer environmental side
effects.
• Furthermore, technologically change provides better ways of handling the quantities of
production residuals that remain.
• In a simple cost model, the technical change shifts the marginal cost curve downward. This
enables the firm to determine how much total production will be reduced because of
technological change.
• The technological progress makes it possible to produce a given increase in output at a
lower marginal cost, as it reduces total production cost.
• total annual cost of producing q* is equal to area b. Thus, the reduction in total cost made
possible by the technologically change is equal to area a.
MC1
MC2
R
a
b
• MC1 represents the firm’s marginal
q* cost curve before a technical improvement
• MC2 represents the firm’s marginal cost curveQafter a technical improvement.
• Consider the output level q*, with MC1, the total annual cost of production output q* is
represented by the area Figure
a+b, whereas after the reduction
1: Technological in the marginal cost to C2, the
Improvement
4
