Final Exam

A monopolist firm faces a demand with constant elasticity of -1.8. It has a constant marginal cost of $22 per unit and sets a price to maximize profit. If marginal cost should increase by 18 percent, would the price charged also rise by 18 percent? A) Yes. Since the price elasticity of demand is constant, P = 2.25 MC. Thus, if MC increases by 18 percent, price also increases by 18 percent. B) No. Since the demand curve is downward sloping, an 18 percent increase in MC will cause the price to increase by less than 18 percent. C) No. Since the demand curve is downward sloping, an 18 percent increase in MC will cause the price to increase by more than 18 percent. D) Yes. Since the price elasticity of demand is constant, P = 1.8 MC. Thus, if MC increases by 18 percent, price also increases by 18 percent.

A

A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit? The monopolist should A) decrease output until marginal revenue equals marginal cost. B) shutdown if marginal cost exceeds marginal revenue. C) increase output until marginal revenue equals marginal cost. D) increase output until marginal revenue equals zero.

A

Day care for children is a competitive industry in long-run equilibrium at a price of $60 per day. In an effort to make day care more affordable for a larger number of families, the government passes a law that limits the amount day care providers can charge to $45 per day. As a result of this price ceiling, A) parents have a more difficult time finding day care providers for their children. B) the demand for day care increases and many new day care centers are established. C) the supply of day care services falls and causes price to fall below $45 per day. D) the demand for day care increases and causes price to rise above the original $60 per day.

A

Deadweight loss is a _____________________. A price ceiling results in a deadweight loss when the ceiling price is set ________________ the market clearing price. A) net loss of consumer and producer surplus; below B) net loss of consumer and producer surplus; above C) net loss in output; below D) net loss in output; above

A

If firms can easily enter and exit a market, then A) firms will produce at minimum average cost in the long run. B) firms will produce at minimum average fixed cost in the long run. C) firms will produce where price is less than marginal cost. D) firms will produce where price is greater than marginal revenue. E) firms will earn zero economic profit in the short run.

A

Predatory pricing is the practice of A) using low prices to drive competitors out of business so that higher prices can be charged in the future. B) charging prices greater than marginal cost. C) colluding with other firms to set prices above competitive levels. D) gouging consumers by charging prices above the monopoly level.

A

What is the difference between economic profit and producer surplus? A) Economic profit includes fixed costs but producer surplus does not. B) Economic profit includes government taxes but producer surplus does not. C) Economic profit includes variable costs but producer surplus does not. D) Producer surplus includes marginal costs but economic profit does not. E) Producer surplus includes opportunity costs but economic profit does not

A

Which of the following correctly describes a factor that will reduce a firm's monopsony power? A) As the market supply curve becomes more elastic, the difference between marginal expenditure and average expenditure decreases. B) If the market demand curve becomes more horizontal, the firm's marginal revenue curve will be more elastic. C) As producers become more sensitive to price, the difference between marginal expenditure and average expenditure increases. D) As the number of buyers decreases, no single buyer can have much influence over the price. E) If the interaction among buyers results in aggressive competition, the firm's average expenditure curve will be more inelastic.

A

Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms would enter an industry if profit will eventually be zero because zero economic profit A) signifies that a firm is earning as much as it could in its next best activity B) becomes positive once the value of the next best use of resources used in production is included. C) indicates other industries are earning negative economic profit. D) corresponds to positive producer surplus in the long run. E) includes the opportunity cost of resources used in production and corresponds to negative accounting profit.

A

You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned with the average product of labor or the marginal product of labor for the last person​ hired? A. The marginal product because it measures the effect the last person hired has on​ output, or total product. This helps determine the revenue generated by hiring an another​ worker, which can be compared with the cost of hiring an another worker. B. The average product of labor because to maximize​ profits, you will want to hire labor up to but not exceeding the point where labor begins to experience diminishing marginal returns. C. The average product of labor because productivity is maximized when average product is maximized. This determines the output where revenue and profit are maximized. D. The marginal product of labor because to maximize​ profits, you will want to hire labor up to but not exceeding the point where labor begins to experience diminishing marginal returns

A

Assuming no fixed costs are avoidable in the short run, a perfectly competitive firm's short-run supply curve is A) the portion of its marginal cost curve that lies above its average total cost curve. B) the portion of its marginal cost curve that lies above its average variable cost curve. C) the portion of its average variable cost curve that lies above its average total cost curve. D) the portion of its average variable cost curve that lies below its average total cost curve

B

Compared to a competitive market, a monopsonist will pay A) a lower price and purchase more. B) a lower price and purchase less. C) a higher price and purchase more. D) a higher price and purchase less.

B

Estimates of future costs can be obtained from a cost function. Are cost functions in practice easy to estimate? Cost functions A) are easy to measure because least-squares regression analysis identifies the shape of the cost curve algebraically. B) are difficult to measure because output data often represent an aggregate of different types of products. C) are easy to measure because allocating costs to a conglomerate of products is easy. D) are difficult to measure because allocating costs to a group of products is difficult. E) are difficult to measure because cost data are often obtained directly from accounting information that excludes fixed costs.

B

How does a change in the price of one input change the firm's long-run expansion path? If the price of an input changes, then the A) isoquants will shift in a parallel fashion, and the firm will substitute away from the relatively more expensive input, pivoting the expansion path toward the axis of the relatively more expensive input. B) slope of the isocost lines will change, and the firm will substitute away from the relatively more expensive input, pivoting the expansion path toward the axis of the relatively cheaper input. C) slope of the isoquants will change, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively cheaper input. D) slope of the isocost lines will change, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively more expensive input. E) isocost lines will shift in a parallel fashion, and the firm will substitute away from both inputs, shifting the expansion path in a parallel fashion.

B

If firms are price takers, then A) they will produce where price equals average variable cost. B) they will produce where price equals marginal cost. C) they will earn zero economic profit. D) they will have market power. E) they will produce where marginal revenue is less than marginal cost.

B

If the firm's average cost curves are U-shaped, why does its average variable cost curve achieve its minimum at a lower level of output than the average total cost curve? The average variable cost curve will achieve its minimum at a lower level of output than the average total cost curve because A) average total cost equals average variable cost plus average fixed cost, and the average fixed cost of production is constant. B) average total cost equals average variable cost plus average fixed cost, and the average fixed cost curve continues to fall as more output is produced. C) average total cost equals average fixed cost plus marginal cost, and the marginal cost curve continues to fall as more output is produced. D) average total cost equals average variable cost plus average fixed cost, and the decrease in average fixed costs with output is always larger than eventual increases in average variable costs with output. E) average variable cost equals average total cost plus average fixed cost, and the average fixed cost of production reaches its minimum at a higher level of output than the average variable cost curve.

B

If the marginal cost of production is greater than the average variable cost of production, then A) average variable cost could be rising or falling because marginal cost and average variable cost are unrelated. B) average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. C) average variable cost is rising because the cost of the last unit produced is adding to total variable cost. D) average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average. E) average variable cost is rising because marginal cost and average variable cost are equal.

B

One condition necessary for successful cartelization is A) supply must be relatively elastic. B) the cartel must control supply. C) the good must have close substitutes. D) the market must have fringe firms. E) there must be no barriers to entry.

B

Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off? Explain. A) No. Although some producers may not be able to compete at the higher price, on net, producers as a whole will benefit from the higher minimum price. B) Yes. If producers produce more than consumers are willing to buy, the extra cost may exceed the gain in producer surplus. The extra cost is equal to the area under the supply curve between the quantity demanded and the quantity supplied. C) No. As long as the minimum price is above the current equilibrium price, producers as a whole will benefit from the price floor. D) Yes. If producers produce more than consumers are willing to buy, the extra cost may exceed the gain in producer surplus. The extra cost is equal to the area under the supply curve between the marketclearing quantity and the quantity supplied.

B

The burden of a tax is shared by producers and consumers. Under what conditions will consumers pay most of the tax? Under what conditions will producers pay most of it? A) It depends on who is legally obligated to pay the tax. Typically producers are required to pay the tax and therefore bear most of the burden. B) If demand is relatively more elastic than supply, consumers will pay more of the tax. C) If demand is relatively less elastic than supply, consumers will pay more of the tax. D) It depends on who is legally obligated to pay the tax. Typically consumers are required to pay the tax and therefore bear most of the burden.

B

What is the difference between economies of scale and returns to scale? A) Economies of scale define how cost changes with output in the long run, and returns to scale define how cost changes with output in the short run. B) Economies of scale define how cost changes with output, and returns to scale define how output changes with input usage. C) Economies of scale are present when the expansion path is a straight line, and returns to scale are present when the expansion path is not a straight line. D) Economies of scale define whether joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product, and returns to scale define how output changes with input usage for a single firm. E) Economies of scale are present when the long-run average cost curve is increasing, and returns to scale are present when the long-run average cost curve is decreasing.

B

What would a profit-maximizing monopoly do in the short run if its fixed costs increased? A) Raise its price by enough to cover the higher fixed costs. B) Keep price and output the same. C) Reduce its price so it would be able to sell more of its product. D) Shut down.

B

What is a production​ function? How does a​ long-run production function differ from a​ short-run production​ function? A. A function showing the highest output that a firm can produce for every specified combination of inputs. In the​ short-run production​ function, all inputs are​ variable, whereas the​ long-run production function has at least one fixed input. B. A function showing the highest output that a firm can produce for every specified combination of inputs. In the​ long-run production​ function, all inputs are​ variable, whereas the​ short-run production function has at least one fixed input. C. A function showing the minimum output that a firm can produce for every specified combination of inputs. In the​ long-run production​ function, all inputs are​ variable, whereas the​ short-run production function has at least one fixed input. D. A function showing the minimum output that a firm can produce for every specified combination of inputs. In the​ short-run production​ function, all inputs are​ variable, whereas the​ long-run production function has at least one fixed input..

B. A function showing the highest output that a firm can produce for every specified combination of inputs. In the​ long-run production​ function, all inputs are​ variable, whereas the​ short-run production function has at least one fixed input

8. Why does a tax create a deadweight loss? What determines the size of this loss? A) The tax raises the price consumers pay and lowers the price producers receive, which reduces the quantity demanded and supplied below the free-market equilibrium, creating a deadweight loss. The size of the loss depends on the elasticity of demand and supply. If demand is relatively inelastic, the loss will be larger than if demand were relatively elastic. B) The tax raises the price consumers pay and producers receive, which reduces the quantity demanded and supplied below the free-market equilibrium, creating a deadweight loss. The size of the loss depends on the elasticity of demand and supply. If demand is relatively inelastic, the loss will be larger than if demand were relatively elastic. C) The tax raises the price consumers pay and lowers the price producers receive, which reduces the quantity demanded and supplied below the free-market equilibrium, creating a deadweight loss. The size of the loss depends on the elasticity of demand and supply. If demand is relatively elastic, the loss will be larger than if demand were relatively inelastic. D) The tax raises the price consumers pay and producers receive, which reduces the quantity demanded and supplied below the free-market equilibrium, creating a deadweight loss. The size of the loss depends on the elasticity of demand and supply. If demand is relatively elastic, the loss will be larger than if demand were relatively inelastic.

C

A firm that has positive accounting profit does not necessarily have positive economic profit. This statement is A) false because economic costs will be greater than accounting costs if depreciation exists. B) false because accounting costs will be greater than economic costs if implicit costs exist. C) true because economic costs will be greater than accounting costs if implicit costs exist. D) false because economic costs will be greater than accounting costs if explicit costs exist. E) true because economic costs will be greater than accounting costs if sunk costs exist.

C

A perfectly competitive firm maximizes its profit by A) producing the output at which its price equals marginal revenue. B) setting its price at the highest level possible. C) producing the output at which marginal cost equals the market price. D) producing the output at which price equals minimum average variable cost.

C

At the point where average variable cost reaches its minimum value A) marginal cost equals zero. B) average variable cost equals average total cost. C) average variable cost equals marginal cost. D) marginal cost also reaches its minimum value.

C

Explain the term "marginal rate of technical substitution." (Assume a two-input production function.) A) The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to keep output constant. B) The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output increases. C) The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. D) The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to increase output by one unit.

C

Faced with constantly changing​ conditions, why would a firm ever keep any factors​ fixed? What criteria determine whether a factor is fixed or​ variable? A. Some factors are simply fixed inputs by definition. For​ example, plant and equipment are fixed inputs regardless of the time horizon. B. The production of most goods requires the use of both fixed and variable inputs. Fixed inputs are inputs that are not consumed during the production​ process, while variable inputs are consumed during the production process. C. Some factors are fixed in the short​ run, whether the firm likes it or​ not, simply because it takes time to adjust the level of the variables. D. Some factors are fixed in the short​ run, whether the firm likes it or​ not, simply because the firm may not have the resources to adjust the level of the variables.

C

If a firm hires a currently unemployed worker, the opportunity cost of utilizing the worker's services is zero. This statement is A) true because the worker's new wages are a sunk cost. B) false because the worker's new wages are an implicit cost. C) false because the worker's time otherwise spent in leisure activities has value. D) false because the worker's time otherwise spent in unpaid household work has no value. E) true because the worker's time otherwise has no value.

C

In the short run when some inputs are fixed, marginal cost must eventually rise as a firm's output increases because A) the prices the firm pays for labor, material and other variable inputs will increase. B) there will eventually be decreasing returns to scale. C) there will eventually be diminishing marginal products for the firm's variable inputs. D) All of the above

C

The menu at Jose​'s coffee shop consists of a variety of coffee​ drinks, pastries, and sandwiches. The marginal product of an additional worker can be defined as the number of customers that can be served by that worker in a given time period. Jose has been employing one​ worker, but is considering hiring a second and a third. Explain why the marginal product of the second and third workers might be higher than the first. The marginal product of the second and third workers might be increasing because A. workers of higher quality can be​ hired, and output will increase at an increasing rate. B. the company can purchase more machinery for the additional​ workers, and output will increase at an increasing rate. C. workers can specialize at a separate task​, and output will increase at an increasing rate. D. workers can take advantage of existing machinery​, and total output will increase. E. workers can take advantage of existing machinery​, and average output will increase.

C

When monopolistically competitive firms make a profit in the short run, then in the long run, their demand curves will A) shift left as existing firms exit. B) remain unchanged because no firms will enter. C) shift left as new firms enter. D) shift right as new firms enter. E) remain unchanged as new firms enter.

C

When the marginal product of labor curve is decreasing, the average product of labor curve A) Must be decreasing B) Must be flat C) May be increasing or decreasing D) Must be increasing

C

Which of the following is an example of a sunk cost? A) The opportunity cost of a company owner's time. B) The amount a company pays for labor to produce its product. C) The amount a company originally paid for specialized equipment for a plant. D) The amount for which a company could rent equipment it owns to another company.

C

Which of the following is least likely to affect the amount of monopoly power a firm is likely to have? A) The price elasticity of demand. B) The extent to which related firms compete. C) The shape of the market supply curve. D) The number of firms in the market. E) The availability of close substitutes.

C

Why might a firm have monopoly power even if it is not the only producer in the market? A) There is a positive relationship between monopoly power and the elasticity of the firm's demand curve, and as long as its demand curve is not perfectly inelastic, the firm will have some monopoly power. B) There is an inverse relationship between monopoly power and the elasticity of the market demand curve, and as long as the demand curve is not perfectly elastic, firms will have some monopoly power. C) There is an inverse relationship between monopoly power and the elasticity of the firm's demand curve, and as long as its demand curve is not perfectly elastic, the firm will have some monopoly power. D) There is an inverse relationship between monopoly power and the elasticity of the firm's demand curve, and as long as its demand curve is perfectly elastic, the firm will have some monopoly power. E) There is a positive relationship between monopoly power and the elasticity of the market demand curve, and as long as the demand curve is not perfectly inelastic, firms will have some monopoly power.

C

Marginal Product (MP)

Change in output/ Change in input

An individual firm's demand curve in perfect competition is A) shaped just like the market demand curve but with smaller quantities demanded B) equal to marginal cost. C) perfectly inelastic. D) a horizontal line at the market price.

D

Can a firm have a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale as output increases? Discuss. A) No. The functional form of the production technology dictates the type of returns to scales it exhibits, and there will only be one of the three types of returns to scale exhibited throughout the range of production possibilities. B) No. The functional form of the production technology dictates the type of returns to scale it exhibits. While a production function can exhibit both increasing returns and constant returns to scale at different levels of output, increasing returns and decreasing returns to scale are mutually exclusive. C) Yes. At low levels of output, increasing marginal returns lead to increasing returns to scale. Then, at intermediate levels of output, diminishing marginal returns lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale. D) Yes. At low levels of output, specialization leads to increasing returns to scale. Once specialization has been exhausted, proportional increases in all inputs lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale.

D

Decreasing returns to scale typically occur because of which of the following reasons? A) Larger scale equipment is less efficient than smaller scale equipment. B) It is difficult to find good workers, so as an organization gets larger each additional worker produces less and less. C) It costs more to operate a larger organization than it does to run a smaller organization. D) The difficulty of coordinating tasks and maintaining communication between management and workers.

D

Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital. A) The substitution of labor for capital increases the MP Subscript Upper L and decreases the MP Subscript Upper K. Since the MRTS is the ratio of the latter to the former, it will diminish as this substitution occurs. B) The substitution of labor for capital increases the MP Subscript Upper L and decreases the MP Subscript Upper K. Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs. C) The substitution of labor for capital decreases the MP Subscript Upper L to a greater extent than it increases the MP Subscript Upper K. Since the MRTS is the product of the former and the latter, it will diminish as this substitution occurs. D) The substitution of labor for capital decreases the MP Subscript Upper L and increases the MP Subscript Upper K. Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs.

D

If firms produce a homogeneous product, then A) consumers will be willing to pay different prices for output from different firms. B) market output will not be a commodity. C) individual firms can raise price without losing all sales. D) products will be perfectly substitutable with one another. E) the market may have multiple prices.

D

If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive. This statement is A) false because economic costs include the same costs as accounting costs. B) false because accounting costs include implicit costs such as the value of the business owner's time. C) true because economic costs include opportunity costs such as expenditures that cannot be recovered. D) true because economic costs include opportunity costs such as the value of the business owner's time. E) false because accounting costs include explicit costs.

D

In perfect competition, a firm's marginal revenue is A) the change in the firm's total revenue divided by the change in the firm's output. B) equal to price. C) the additional revenue the firm earns when it sells one more unit of output. D) All of the above. E) Only A and B above.

D

It is possible to have diminishing marginal returns to a single factor of production and constant returns to scale at the same time. Discuss. A) The statement is false. If an input exhibits diminishing marginal returns, then doubling that input will result in less than double the output. B) The statement is true. As long as only one input has diminishing marginal returns, it is possible to have constant returns to scale. C) The statement is false. The terms 'marginal returns' and 'returns to scale' are interchangeable. Therefore, if the factors of production have diminishing marginal returns, then there are decreasing returns to scale. D) The statement is true. Diminishing marginal returns to a single factor applies to the short run when all other inputs are held fixed. On the other hand, returns to scales applies to the long run when all inputs can be increased.

D

Labor productivity A) equals the average product of labor. B) determines the real standard of living for a country. C) growth depends on growth in the stock of capital. D) All of the above are true.

D

To be successful, a cartel must A) resist attempts to divide the market among members. B) have firms that disagree on the optimal price. C) be unable to monitor its members. D) have a mechanism to enforce agreements. E) provide firms an incentive to cheat.

D

Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. To maintain a particular support price, how must the quota amount change if the demand curve becomes more elastic? A) The quota amount depends on the supply curve. B) The quota amount does not change. C) The quota amount increases. D) The quota amount decreases

D

What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? For a market to be perfectly competitive, A) only a few firms may produce output, firms must have market power, and firms must produce a homogenous product. B) firms must have market power, firms must produce a differentiated product, and firms must be able to easily enter and exit the market. C) only one firm can have access to a key input, the government must regulate entry of new firms, and the long-run average cost of production must be decreasing. D) firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market. E) only one firm can produce output, no close substitutes may exist, and firms must not be able to enter the market.

D

What is the difference between a production function and an isoquant? A) A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. B) A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output. C) A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. D) A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output

D

Which of the following are reasons that firms​ exist? A. Firms exist because they allow goods and services to be produced more efficiently than without them. B. Firms offer a means of coordination that would be missing if workers operated independently. C. Firms eliminate the need for every worker to negotiate over every task to be performed and bargain over the fee to be paid for each task. D. All of the above are reasons that firms exist.

D

Which of the following is NOT a result of learning that helps a firm reduce its costs as its cumulative output increases? A) Managers learn to schedule and organize the production process more effectively. B) Workers become more skilled as they gain experience producing the firm's product. C) Engineers develop better and more specialized tools to produce the firm's product. D) The firm can negotiate with suppliers for lower input prices.

D

Which of the following is not true in a monopolistically competitive market? A) Firms sell differentiated products that are highly substitutable with each other but not perfectly substitutable. B) Each firm's demand curve is more elastic than the market demand curve. C) There is free entry and exit. D) All firms are price takers.

D

Why is there no market supply curve under conditions of monopoly? A) Since the monopolist is the only firm in the market, it simply allows its marginal cost curve to act as the "monopolist's" supply curve B) Output decisions depend not only on marginal cost but also on the demand curve. Shifts in demand lead to changes in output but not price. Thus, there is no one-to-one correspondence between price and the seller's quantity. C) Output decisions depend not only on marginal cost but also on the demand curve. Shifts in demand lead to changes in price but not output. Thus, there is no one-to-one correspondence between price and the seller's quantity. D) Output decisions depend not only on marginal cost but also on the demand curve. Shifts in demand lead to changes in price, output, or both. Thus, there is no one-to-one correspondence between price and the seller's quantity.

D

Which of the following correctly describes how a firm's monopoly power would decrease? A) If the cost of production increases, the firm's demand will become more elastic. B) If the production process includes more fixed inputs, the firm's demand will become more elastic. C) If the number of firms increases, the firm's demand will become more inelastic. D) If other firms are reluctant to raise their price, the firm's demand will become more inelastic. E) If the market demand curve becomes more elastic, the firm's demand curve will become more elastic.

E

Why would a firm that incurs losses choose to produce rather than shut down? In a perfectly competitive industry, if a firm is incurring losses, then it might choose to produce in the short run because A) variable costs are greater than fixed costs, resulting in smaller losses than would result from shutting down. B) average fixed cost becomes zero in the long run, resulting in profit in the long run. C) revenue is greater than fixed costs, resulting in smaller losses than would result from shutting down. D) revenue is greater than variable costs, resulting in smaller losses than would result from shutting down. E) price is greater than average variable cost, resulting in profit in the long run.

E

Rule of Thumb for Pricing

E is the elasticity of demand facing the firm, not the market elasticity of demand

Tax Passed to consumers

Es/ (Es - Ed)

Marginal Cost Equation

P (1 + 1/Ed)

Average Product (AP)

Quantity/Input

Total Output

average product * input

learning curve effect

cost falls over time as managers and workers become more experienced and effective

Suppose that labor is the only variable input to the production process. If the marginal cost of production is diminishing as more units of output are produced, what can you say about the marginal product of labor?

it is increasing

diseconomies of scale

to double the output you need to more than double your cost

Variable cost of production

total cost - fixed cost

A production input that can be varied in both the short run and the long run is called a __________

variable input