Final Exam (Econ 201)

Based on the relationship between average total cost and marginal cost, which of the curves appears to be average total cost?

Curve 2

According to the graphs, which of the following is likely to happen in this market in the long run?

No other firms will enter this market

Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity?

Opportunity cost

When does constant return to scale occur?

Over the range of the output where the long-run average cost is not changing. This is represented by the flat part of the long-run average cost curve.

In this graph, the market is initially in long-run equilibrium at point A. If this is a constant-cost industry, after the decrease in demand, which point is likely to be a short-run equilibrium and which point is likely to be the next long-run equilibrium?

Point D is a short-run equilibrium and point C is the new long-run equilibrium (When demand shifts to the left, the new equilibrium price will be $7 at point D. As time passes, firms will begin to exit this market since they are experiencing economic loss. The exit of these firms will shift the supply curve to the left and push prices back up to $10 at the long-run equilibrium point C)

According to the graph, what size bookstore is more likely to experience diseconomies of scale?

According to the graph, bookstores that sell more than 80,000 books per month are more likely to experience diseconomies of scale. As you can see, in the graph when bookstore sales exceed 80,000 books per month the long-run average cost curve begins to slope steeply upward. This indicates long-run average costs are increasing rapidly beyond this point

According to the graph, which change in output represents economies of scale in bookselling?

According to the graph, the change in output from 1,000 to 20,000 books sold per month represents economies of scale in bookselling. As you can see, the long-run average cost curve is decreasing over this range of output so this is the range where the bookseller can really benefit from selling more books.

Minimum efficient scale is the level of output at which?

All economies of scale have been exhausted (Output beyond this point will bot lower long-run average cost. Graphically this is the point where the curve ceases to fall and typically flattens out at this point to generate constant returns to scale)

Which graph is representative of a typical average total cost curve?

Graph B

The relationship between the inputs used by the firm and the maximum output it can produce is known as the:?

Production Function. The production function is directly related to the level of technology a firm uses. Firms can opt to use more labor and less technology, or vice versa. For this reason, a production function can differ from firm to firm, even if they are in the same industry. The other phrases may be used in manufacturing and operations but are not common phrases seen in economics when studying production

What is the accounting profit?

Profit is total revenue minus explicit cost (Only include the explicit cost)

In perfect competition, the marginal revenue is?

The same as price. Marginal revenue is always the amount of revenue you receive from selling one more unit. In perfectly competitive markets. Marginal revenue = marginal benefit = price

What are sunk costs?

Those cost that represent money spent that cannot be recovered

According to the data in the table, what is the marginal cost of producing the 640th pizza?

$43.33 (When you move from producing 625 pizzas to producing 640 pizzas, the total cost increases from $4,050 to $4,700, which is an increase of $650. Therefore, it costs $650 to produce another 15 pizzas (^40 pizzas minus 625 pizzas = 15 pizzas. So, the marginal cost of producing. So, the marginal cost of producing that last pizza is equal to $650/15= $43.33))

If you have to pay $500 a month to the landlord, what would happen to the accounting profit?

(Explicit cost increase $500

The short run is a period of time where _______ while the long run is a period of time where _________?

At least one input is fixed, all inputs are variable

Based on the relationship between marginal and average product, which curve appears to be the average product curve?

Based on the relationship between marginal and average product, curve 2 appears to be the average product curve. When marginal product is greater than average product, the average product curve will be rising and when marginal product is lower than the average product the average product will be falling. For this reason, Curve 1 has to be the marginal product curve and Curve 2 is the average product curve

What does the shaded are in the graph represent for a perfectly competitive firm that produces at output level Q?

Negative economic profit

According to the graph, over what range of output do we find constant returns to scale in bookselling?

Between 20,000 and 40,000 books (constant return to scale occur where the firm's long-run average costs are flat. At the same point, these costs will begin to increase and the firm will begin to experience diseconomies of scale. In this graph, the point of increasing long-run average costs begin at 40,000 books and continues thereafter)

Long-run equilibrium in perfect competition results in?

Both productive and allocative efficiency

According to the graph, which of the following is more likely to occur when moving from point A to point B?

Diminishing returns

The downward sloping part of the long run average total cost curve is where the firm is achieving:?

Economies of scale. Economies of scale happen when the long-run average cost decreases as output increases. This is represented by the downward-sloping part of the long-run average cost curve.

Which of the following are sometimes called accounting costs? 1. Economic 2. Implicit 3.Explicit

Explicit

If you have to pay $500 a month to the landlord, would it be implicit or explicit? Then would it increase or decrease?

Explicit Cost and it would increase

Example: Rent is 200,000 and the cost before was $150,000. Now you have to pay an extra $500. Before this incident, you were total revenue minus total cost (200,000-150,000 = 50,000). What if the rent prices increase? Then what would happen to the profit? Would it increase or decrease?

Explicit cost would then become $155,000. The profit would decrease by $500. (If you have more cost then that means you have less profit)

In the short-run, the cost that is independent of the amount of output produced is called?

Fixed Cost. Fixed cost does not change with the level of output. An example of a fixed cost would be the cost of the equipment used to manufacture a product.

According to the table, which of the following are implicit costs?

Foregone salary and foregone interest. These are the costs associated with giving up one alternative to pursue another. They are also implicit costs since they are not costs you actually pay out-of-pocket, but instead represent monies you could have received had you selected another option. All other costs are explicit, or out-of-pocket costs that firm must make

What are explicit costs?

Include any out-of-pocket cost that you pay such as supplies, utilities, labor, and so on

What is price taker?

Is a firm that is unable to affect the market price

As the market demand shifts to the left, how will the firm's level of output change?

The firm will decrease its output and suffer losses

When graphing a conventional short-run production function, we place _____________ on the horizontal axis and _____________ on the vertical axis

When graphing a conventional short-run production function, we place the variable input on the horizontal axis and output on the vertical axis. The short-run production function shows the quantity of output that can be produced by a variable input (such as labor), while another input (such as capital) remains fixed

Is the following statement correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be horizontal line. But this cannot be true; When the price pf wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demand rises. Therefore, the demand for wheat is not a horizontal line."

The statement is incorrect. The remark confuses the market demand for wheat with the demand facing one farmer selling wheat. The demand curve for the output of a single wheat farmer is not downward-sloping: it is a horizontal line. If an individual wheat farmer tries to increase the price he charges for his wheat, the quantity demanded falls to zero because buyers will purchase from one of the other 225,000 wheat farmers

Where is the perfectly competitive firm will maximize profit?

Profit is maximized at the point where marginal revenue is equal to marginal cost. As long as marginal revenue exceeds marginal cost, the firm can make additional profit by producing that next unit. However, at some point diminishing marginal returns will increase marginal cost to the point where It will eventually be equal to marginal revenue. At this point, the profit is maximized. If the marginal costs $3.95 and the marginal revenue is $3.96, you will still make a penny from producing that unit so you should continue to produce.

What will happen in the long run for a firm?

No other firms will enter this market. Firms will enter a market only if they expect to make an economic profit. Firms will leave a market if they are suffering losses. In this case, the price is equal to the average cost at the chosen quantity, so there is zero economic profit, and therefore, no incentive to enter or exit the market.

According to the table, what is the average total cost of producing 550 pizzas?

$5.00 (According to the table, the average total cost of producing 550 pizzas $5.00 per pizza. The average total cost is equal to the total cost divided by the output produced. Therefore the average cost is equal to $2,750/550=$5.00

When are firms likely to be price takers?

A firm is likely to be a price taker who it is represents a small fraction of the total market

In the short run, the firm should?

operate if price > average variable cost

According to the graph, which level of output represents the minimum efficient scale in bookselling?

20,000 books. The minimum efficient scale occurs at the level of output where all economies of scale have been exhausted. In the graph, you can see that long-run average costs are falling until you reach 20,000 books and then constant returns to scale engage and long-run average costs are flat

What are the three conditions for a market to be perfectly competitive?

For a market to be perfectly competitive, there must be: many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market

What is occurring from the origin up until point A in this graph?

From the origin up until point A in this graph output increases at an increasing rate. Because of the benefits of specialization and the division of labor output will first increase at an increasing rate. During this phase of production each additional worker hired causes production to increase by more than the hiring of the previous worker. (At some point the law of diminishing returns will emerge and the marginal productivity of the next worker will begin to decline)

If the average total cost curve is above the demand, then this firm is?

Having economic losses. A demand curve represents the number of units demanded at each price for that good. If the demand curve is below the average total cost curve, then that means the costs to produce are higher than every price point on the demand curve. The firm will exit this market in the long run since economic profits are not possible.

What happens in the short-run?

In the short-run, the firm will continue to produce as long as marginal revenue exceeds average variable cost since the different will at least cover a portion of fixed costs. However, when marginal revenue falls below average variable cost the firm is losing money with each additional unit of output so it will not be producing at this point which is consistent with demand 1. At demand 4, the firm is making zero economic profit since marginal revenue equals average total cost. The firm will continue to produce at this point.

When the marginal product of labor is greater than the average product of labor, then the average product of labor must be:?

Increasing

What is the name for the additional output that a firm produces as a result of hiring one more worker?

Marginal product of labor

A firm in a perfect competition earns profit if?

Price is greater than average total cost. A firm must cover all cost in order to make a profit. This only occurs if the price per unit is higher than average total cost to produce the product.

In perfect competition, when a firm is making positive economic profit in the short-run, then new firms enter the market causing the market supply curve to?

Shift rightward and the market price to decrease. Freedom of market entry and exit will ensure that in the long-run economic profits will be zero. As firms make economic profit, it will attract new entracnts to this market and shift the supply curve to the right. This increase in supply pushes price lower until the long-run equilibrium price is established where all firms make zero economic profit. If price falls to where firms are making economic losses, then firms will exit (supply shift to the left) and prices will move back higher until a new long-run equilibrium is established where economic profits are zero.

Which of these costs are affected by the level of output produced?

Variable Cost are affected by the level of output produced. Variable costs, specifically define, are those costs that vary with the number of units produced. Conversely, fixed costs remain the same regardless of the level of output. The cost of raw materials and components used to manufacture a product are good examples or variable costs.

What are variable costs?

Variable costs vary directly with the level of output. As output increases so do variable costs. Example include the cost of raw materials used to produce a product

When do diseconomies of scale occur?

When long-run average cost is increasing as output increases. This is represented by the upward-sloping part of the long-run average cost curve.

According to the table of data, when do diminishing returns in the production of pizza begin?

When the third worker is hired (according to the table of data, diminishing returns in the production of pizzas begin when the third worker is hired. The marginal product of labor goes from 250 when the second worker is hired to 100 when the third worker is hired. This decline illustrates the law of diminishing returns. (The pizza kitchen may be too small for the third worker to really increase production. Or the production of pizzas may not benefit from addition specialization in the production of pizzas)