econ chapter 13

Refer to Figure 7-10, if the market equilibrium price falls from $120 to $80, how much is the change in total consumer surplus in the market?

$1000

Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal

$110

At Q = 5, the marginal buyer is willing to pay $50 for a t-shirt. Suppose P = $30. What will the consumer surplus be?

$20

Refer to Figure 7-10, if the market equilibrium falls from $120 to $80, how much consumer analysis do consumers entering the market after the price drop receive?

$200

The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog bed can be sold for a price of $65. The Three Amigo's total costs are

$25,000

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8

Refer to Figure 7-10, if the market equilibrium price is $120, how much is total consumer surplus?

$800

total surplus

** CS + PS measure of society's well-being - to consider whether the market's allocation is efficient total surplus = value to buyers - cost to sellers - sum of consumer and producer surplus area below the demand curve and above the supply curve

Total Revenue (TR)

** Price x Quantity (P x Q) the amount a firm receives for the sale of its output

Consumer Surplus (CS)

** WTP - P - the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it - benefits buyers receive from participating in a market

total cost (TC)

** fixed costs + variable costs the market value of the inputs a firm uses in production

the benevolent social planner

- all knowing, all powerful, well intentioned dictator - wants to maximize the economic well-being of everyone in society - evaluate market outcomes - cares about efficiency and equality

Allocation of resources refers to

-how much of each good is produced -which producers produce it -which consumers consume it

Refer to Figure 13-2, what is the marginal product of the first worker?

A. 300

Average Total Cost (ATC)

ATC = TC/Q = AFC + AVC - the cost of the typical unit produced - total cost divided by the quantity of output

in the long run...

ATC at any Q is the cost per unit using the most efficient mix of inputs for that Q (e.g. the factory size with he lowest ATC)

economies of scale

ATC falls as Q increases

You work at the local store that sells refurbished iPads The store is running a sale on the refurbished iPad mini 3. Each of your roommates wants one. Their willingness to pay is given below. If the sale price is $200, who will buy an iPad, and what is the quantity demanded? Alexis: $250 Cameron: $175 Fatima: $300 Jamir: $125

Alexis and Fatima will buy one each. Hence, Qd = 2 when P = $200

the law of decreasing returns

As a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases

Refer to Figure 7-12, how much are consumer surplus, producer surplus, and total surplus at the market equilibrium price?

Consumer: $312,50 Producer: $312.50 Total: $625

Total Cost (TC)

FC + VC - total cost of producing a given amount of output

Average Fixed Cost (AFC)

FC/Q

A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but would refuse to buy a product at a price less than his willingness to pay. T/F?

False

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 132 units of output.

a. 8 units of output

The average fixed cost curve. A. always declines with increased levels of output. B. always rises with increased levels of output. C. declines as long as it is above marginal cost. D. declines as long as it is below marginal cost.

a. always declines with increased levels of output

Long Run (LR)

all inputs are variable (e.g. firms can build more factories or sell existing ones)

producer surplus

amount received by sellers - cost to sellers area below P and above the S curve - sellers' gains

Refer to 13-2. Curve A represents which type of cost curve?

average fixed cost

allocation of resources

decentralized (in a market economy) - determined by interactions of many self-interested buyers and sellers

Refer to Figure 7-1, when the price rises from P1 to P2, consumer surplus...

decreases by an amount equal to B + C

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes

decreases, and the consumer surplus in the market for red wine decreases

equality

distribute economic prosperity uniformly among the members of society - every member of society gets an equal slice of the pie?

fixed costs (FC)

do not vary with the quantity of output produced incur even if production is zero

In the long run a company that produces and sells popcorn incurs total costs of $1050 when output is 90 canisters and $1200 when output is 120 canisters. The popcorn company exhibits

economies of scale because average total cost is falling as output rises.

Jelani invested $80,000 in the factory and equipment to start the business last year: $30,000 from savings and borrowed $50,000 (interest 10% for saving and borrowing). Identify and calculate the explicit and implicit costs.

explicit cost: the interest Jelani has to pay every year - the 10% interest on the borrowed money = 0.10 × 50,000 = $5,000 implicit cost: the interest Jelani could have earned if savings were saved not spent - the 10% on $30,000 = 0.10 × 30,000 = $3,000 the opportunity cost of capital = $8,000 per year

A firm's opportunity costs of production are equal to its

explicit costs + implicit costs

total cost

explicit costs + implicit costs

Jelani owns a small gelato shop on campus. Jelani pays $20,000 a year for raw materials, and $12,000 in rent. Jelani can work at the local coffee shop for $25,000 a year. Identify and calculate the explicit and implicit costs.

explicit costs: raw materials and rent = $32,000 implicit cost: opportunity cost of the owner's time = $25,000 total cost = $57,000

Marginal returns start to decrease when more and more workers __________.

have to share the same equipment and workspace

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do

implicit costs

input costs that do not require an outlay of money by the firm (opportunity cost of the owner's time)

explicit costs

input costs that require an outlay of money by the firm (paying wages to workers)

In the long run,

inputs that were fixed in the short run become variable

When average variable cost is at its minimum level, marginal product ________.

is at its maximum level

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs

Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers

labor to be variable and capital to be fixed

Firms may experience diseconomies of scale when

large management structures are bureaucratic and inefficient - more common when Q is high

What are economies of scale?

long-run average total cost falls as the quantity of output increases

When a firm experiences diseconomies of scale,

long-run average total cost increases as output increases - ATC rises as Q increases

When a firm experiences constant returns to scale,

long-run average total cost is unchanged, even when output increases.

Economies of scale occur when

long-run average total costs fall as output increases

An increase in the rent that a firm pays for its factory does not increase ___________ .

marginal cost

The minimum points of the average variable cost and average total cost curves occur where

marginal cost curve intersects those curves

Average variable cost is at a minimum when __________ .

marginal cost equals average variable cost

The average product of labor increases as output increases if __________ .

marginal product exceeds average product

market failures

market power: a single buyer or seller (small group) control market prices - markets are inefficient externalities: decisions of buyers and sellers affect people who are not participants in the market at all - inefficient equilibrium: from the standpoint of society as a whole

A result of welfare economics is that the equilibrium price of a product is the best price because it

maximizes the combined welfare of buyers and sellers

increasing marginal returns

occur when the marginal product of an additional worker exceeds the marginal product of the previous worker - has positive slope

decreasing marginal returns

occur when the marginal product of an additional worker is less than the marginal product of the previous worker - has negative slope

assumption

production in the short run factory size is fixed to increase production, hire more workers

An increase in the wage rate _________.

shifts the average total cost curve and the marginal cost curve upward

the goal of firms

to maximize profit, which equals total revenue minus total cost

economic profit

total revenue minus total cost (including both explicit and implicit costs)

accounting profit

total revenue minus total explicit cost

Jelani owns a small gelato shop on campus. She can make 15,000 pints of gelato a year, and sell them at $5 each. If Jelani's total costs are $65,000 a year, how much profit will be brought in after one year?

total revenue: $5 x 15,000 = $75,000 profit: $75,000 - $65,000 = $10,000

consumer surplus

value to buyers - amount paid by buyers area below the D curve and above P - buyers' gains

If a firm produces nothing, which of the following costs will be zero?

variable cost

variable costs (VC)

vary with the quantity of output produced

Marginal Cost (MC)

ΔTC / ΔQ - the increase in total cost that rises from quantity of input - determined by shape of MP curve

Cost

the value of everything a seller must give up to produce a good, inc. opportunity cost - measure of willingness to sell, only iff price > cost

Free Market Outcomes

1. Allocate the supply of goods to the buyers who value them most, as measured by their WTP 2. Allocate the demand for goods to the sellers who can produce them at the lowest cost 3. Produce the quantity of goods that maximizes the sum of consumer and producer surplus - raising or lowering the quantity of a good would not increase total surplus

Cindy's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm's total cost is

500

What best describes economic profit and accounting profit?

Economic profit equals total revenue minus both explicit and implicit costs; Accounting profit equals total revenue minus total explicit cost

constant returns to scale

Long-run average total cost stays the same as the quantity of output changes - ATC stays the same as Q increases

marginal product of labor

MPL = ∆Q / ∆L

Which definition best describes diminishing marginal product?

Marginal product of an input declines as the quantity of the input increases

total producer surplus

PS = 1/2 x b x h

Total revenue equals

Price x Quantity

profit equation

TR - TC

Which of the following is an example of an implicit cost?

The owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm

Jelani owns a small gelato shop on campus. She can make 15,000 pints of gelato a year, and sell them at $5 each. Jelani pays $20,000 a year for raw materials, and $12,000 in rent. Jelani can work at the local coffee shop for $25,000 a year. Jelani invested $80,000 in the factory and equipment to start the business last year: $30,000 from savings and borrowed $50,000 (interest 10% for saving and borrowing). Calculate accounting and economic profit.

Total revenue TR = $5 × 15,000 = $75,000 Explicit costs = raw materials + rent + interest paid = $20,000 + $12,000 + $5,000 = $37,000 Implicit costs = alternative job + forgone interest = $25,000 + $3,000 = $28,000 Accounting profit = TR - explicit costs = $75,000 - $37,000 = $38,000 Economic profit = TR - (explicit + implicit costs) = $75,000 - ($37,000 + $28,000) = $10,000 = Accounting profit - implicit cost

All else equal, an increase in supply will cause an increase in consumer surplus. T/F?

True

Average Variable Cost (AVC)

VC/Q - shape is determined by shape of AP curve

average product curve

shows the average product that is generated by input at each level of the input - has an upside down U shape

Short run (SR)

some inputs are fixed (e.g factories, land) the costs of these inputs are FC

What is welfare economics?

studies how the allocation of resources affects economic well-being

efficiency

the allocation of resources maximizes total surplus - is the pie as big as possible?

Producer Surplus (PS)

the amount a seller is paid for a good minus the seller's cost - price received minus willingness to sell area below the price and above the supply curve - total area is the sum of the producer surplus of all sellers

total consumer surplus

the area below the demand curve and above the market price - the height of the demand curve = the value buyers place on the good (WTP) - Each buyer's CS = WTP - P

A firm's cost of production equals _________ .

the costs of all resources used by the firm whether bought in the marketplace or owned by the firm.

assumption

the goal of a firm is to maximize profit

marginal product

the increase in output arising from an additional unit of that input other inputs constant slope of the production function

Willingness to Sell (WTS)

the lowest price accepted by a seller for one unit of a good or service

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases production functions gets flatter as Q of inputs are increased the slope of the production function decreases hiring one extra worker... - increases output by MPL - increases costs by the wage paid

Willingness to Pay (WTP)

the maximum amount that a buyer will pay for a good and how much that buyer values the good

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good gets flatter as production rises

In the long run, with an increase in the plant size, __________.

the short-run average total cost curve shifts downward if economies of scale exist