Unit 6 Microeconomics: Fall 2020

(6B): Refer to the figure above. The pizza shop earns a ______________ of ______________ when it uses 3 workers per day. (PICTURE 5)

(6B): profit; 550

(6B): Refer to the figure above. The firm earns a ______________ of ______________ when it produces 120 units of output. (PICTURE 1)

(6B): profit; 64

(6B): Does the graph above represent the firm's short run equilibrium or long run equilibrium, for a given price? (PICTURE 2)

(6B): short run

(6B): Last summer Casey took fresh vegetables to sell at the Farmer's Market, but this year Casey did not plant any vegetables and went to work at the local bank. If Casey's decision to change careers did not change the market price for vegetables at the Farmers' Market, it is because

(6B): the Farmers' Market attracts a large number of vegetable farmers.

(6B): Refer to the figure above. Suppose a law is passed requiring restaurants to charge no more than $25 per meal. This law would (PICTURE 3)

(6B): unambiguously reduce producer surplus, but not force restaurants to shut down.

(6B): Why are you more likely to see a poor person picking up aluminum cans than a wealthy person?

(6B): wealthy people have higher opportunity costs for their time

(6B): Refer to the figure above. When the demand is P = $30, how much profit is this producer earning? (PICTURE 2)

(6B): 800

(6B): John is trying to decide how to divide his time between his job as a stocker in the local grocery store, whichpays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: Refer to the chart above. Does the 3hour cleaning satisfy the cost-benefit principle? (PICTURE 4)

(6B): no, since the additional amount earned is $6

(6A): In your own words, explain why a firm may face diminishing marginal returns to labor as the amount of labor used increases.

NO ANSWER

(6A): If the fixed cost of producing 50 units of output is $100,000 per year, the fixed cost of producing 100 units of output per year is _____.

(6A): 100,000 --> Fixed cost represents the cost per period for the fixed input. The amount paid is unrelated to the amount produced because the quantity of the fixed input does not change.

(6A): At 600 units of output, total fixed cost is equal to $1,000 and total variable cost is equal to $12,000. Total cost is equal to _______.

(6A): 13,000 --> $1,000 + $12,000 = $13,000

(6A): Suppose that a factory is producing two automobiles per hour. The total fixed cost is $20,000. The total variable cost is $10,000. The average cost is ______________.

(6A): 15,000 --> Average cost is the total fixed plus the total variable cost divided by the number produced. Thus, average cost equals $15,000.

(6A): Given the previous question, suppose that we now increase production by one automobile per hour. If the cost of that additional automobile is $18,000, what is the new average?

(6A): 16,000 --> The average cost would be total cost ($15,000 + $15,000 + $18,000) divided by the number of automobiles produced (3). Average cost is $16,000. The lesson to remember is that if marginal cost is greater than the average cost, the average cost will increase.

(6A): The fixed cost of producing surfboards is $5,000 per month. The variable cost for producing 15 surfboards is $36,000 per month. The average cost of producing 15 surfboards in a month is ______.

(6A): 2,733.33 --> Total cost = $5,000 + $36,000 = $41,000. Average cost = $41,000/15 = $2,733.33.

(6A): Fill in the missing value for B from the table below. (PICTURE 2)

(6A): 240 --> Output at L = 3 = output at L=2 + MP: 180 + 60 = 240 (or Q = APL = 803 = 240).

(6A): Peter can produce 50 lunches per hour for $1,250. If he hires one more cook for $15 an hour, he can produce 55 lunches per hour. The marginal cost of expanding hourly lunch production from 50 to 55 is _____.

(6A): 3 --> $15/(55-50) = $15/5 = $3

(6A): At 2,000 units of output, the variable cost of production is $12,500 per week. Total cost of producing 2,000 units per week is $45,500. The fixed cost of producing 2,000 units of output per week is equal to ______.

(6A): 33,000 --> $45,500 - $12,500 = $33,000

(6A): Santa Claus's only variable input is labor. The wage he must pay is 200 candy canes per week. What is Santa's total weekly variable cost if he hires 200 elves?

(6A): 40,000 --> 200 candy canes * 200 elves = 40,000 candy canes

(6A): Using the information from the table below, what is the marginal product of the 4th worker? (PICTURE 4)

(6A): 45 office chairs --> Total output changes by 45 office chairs. Labor input changes by 1 worker. Marginal product is change in output divided by change in input.

(6A): Using the information from the table above, if the monthly wage of an office chair factory worker is $2,160, what is the marginal cost of increasing output from 190 office chairs per month to 235 office chairs per month? (PICTURE 4)

(6A): 48 --> Change in total cost is the cost of 1 more worker ($2,160). Change in output is 45 office chairs. $2,160/45 = $48.00.

(6A): The production of 75 sofas per week requires 15 workers. The average product of each worker is ______________ sofas per week.

(6A): 5 --> 75/15 = 5

(6A): Samantha is evaluating whether to increase production at her book bindery. If she hires one more worker, she can increase output by 50 books per week. A book binder's weekly wage is $250. Samantha's marginal cost of increasing output by 50 books per week is ________.

(6A): 5 --> Total cost goes up by $250 (1 worker * wage) and total output goes up by 50. Marginal cost = $250/50 = $5.00.

(6A): In the table below, what is the marginal product of the third worker? (PICTURE 1)

(6A): 55 workers --> The change in output caused by adding the third worker is (190-135) = 55 units.

(6A): Fill in the missing value for C from the table below. (PICTURE 2)

(6A): 70 --> AP = output /L = 280/4 = 70.

(6A): Fill in the missing value for A from the table below. (PICTURE 2)

(6A): 80 --> Change in output = 180-100 = 80. Change in labor =1. 80/1 = 180.

(6A): If the average product of labor is 12 units of output per worker per day when eight workers are hired, eight workers will be able to produce a total of ______________ units per day.

(6A): 96 --> X/8 = 12, therefore 8*12 = X = 96

(6A): Using the table below, calculate the marginal cost of the 4, 6, and 8units of output. (PICTURE 3)

(6A): A=90, B=110, C=125 --> MC = change in total cost / change in output

(6A): Which of the following most likely represents a short-run business decision?

(6A): Aaron hires two additional workers to help cover the holiday rush --> Short run decisions typically can be carried out quickly while other factors will take more time to change.

(6A): The law of diminishing marginal returns is the cause of ______________marginal product and ______________marginal cost.

(6A): Decreasing; increasing --> The law of diminishing marginal returns states that if every other input is held constant, increases in the variable input will eventually result in smaller increases in output. Thus, marginal product eventually decreases. A decreasing marginal product means that a given change in input produces smaller additions to output. Thus, the cost of those additional units of output, the marginal cost, must increase.

(6A): In a model with only labor and capital as inputs, in the short run the amount of ______________ is fixed, while in the long run the amount of ______________ is variable.

(6A): Either labor or capital, both labor and capital --> The short run is defined by there being at least one input that cannot be altered. It does not matter which one is fixed. In the long run, all inputs can be changed.

(6B): Refer to the figure above. When the market price of a doughnut is 25 cents, this firm will (PICTURE 6)

(6B): produce 80 doughnuts

(6B): Assume that a firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5, the wage rate is $10, and rent is $200. The firm will earn a ______________ of ______________.

(6B): profit; 170

(6A): In your own words, explain why a firm may face diminishing marginal returns to labor as the amount of labor used increases.

(6A): If we increase one of the inputs into a production process and hold the others constant, we will eventually reach the point of diminishing marginal returns. One explanation might be that each additional worker does not have sufficient tools to use and may have to wait or arrange production in order to share the available tools. Think of data entry clerks working with a given number of computers. As the number of workers increases, total production per hour increases. As we add workers, each additional worker may add an increasing amount to production as workers cooperate and specialize. But eventually, given the fixed number of computers, workers will have to wait for their time on the machines and may not be able to spend their time as effectively as they can when each worker has their own computer. The additions to total production are the marginal returns to the additional workers. At first there may be increasing returns due to specialization and possible cooperation. But eventually, there will be diminishing marginal returns.

(6A): Which of the following is a cause of diminishing marginal productivity?

(6A): In the short run, labor runs out of available capital as more labor gets added to the production process. --> As more of the variable input (labor in this case) is added to the fixed amount of the fixed input (capital in this case), the fixed input becomes scarce (or crowded), which makes the variable input less productive at the margin.

(6A): Explain in your own words why average product can increase even when the marginal product decreases, as long as marginal product is still above the average product.

(6A): The fact that marginal product increases or decreases as the amount of labor increases does not affect whether the average product increases or decreases. Average product will always increase if the marginal product is larger than the average. Average product will decrease if the marginal product is less than the average. A marginal product that is greater than the current average means that more product is being added by the additional worker than the average worker was producing. Thus, the average will increase.

(6A): If marginal cost is equal to average cost, average cost at this point must be ______________.

(6A): at its minimum point --> Because the marginal cost is equal to average cost, an increase in output will add an amount to total cost that is exactly equal to the average cost. Thus, the average will be at its minimum point.

(6A): If average product is increasing as the variable input increases, which of the following is true?

(6A): average cost must be decreasing --> a is incorrect - If on average each unit of the variable input produces more units of output average cost must be falling. b is incorrect - If marginal product is also increasing (which is possible) then marginal cost would be falling. c is also incorrect. It is possible for marginal product to be falling (but still above average product). If marginal product is falling then marginal cost would be rising. d is correct. If the average product is increasing, fewer resources are needed to expand output by one unit of output. Thus, average cost must be falling.

(6A): Currently, the marginal product of labor is 32 units per week. The average product of labor at the current level of output is 48 units per week. If the employer hires one more worker, the marginal product of labor will be 30 units per week. The average product of labor will ______________.

(6A): fall --> MP<AP therefore AP is falling.

(6A): Using the information in the question above, if Samantha's average cost to bind books is $2.50 before hiring the additional book binder, her average cost to bind books will ______________ if she hires the additional worker.

(6A): increase --> if MC > AC, AC will rise

(6A): Will a change in fixed costs change marginal cost?

(6A): no --> A change in fixed costs will only change total costs and average costs. Marginal cost is affected only by changes in variable costs.

(6A): Variable cost ______________ while fixed cost ______________ as output ______________ in the short run.

(6A): rises, stays the same, increases --> The use of a variable input increases as output increases. Therefore, its total cost increases as output increases (you have to buy more). Fixed cost stays the same no matter what the level of output in the short run.

(6A): marginal cost is the slope of

(6A): the total cost curve --> The slope of the total cost curve is the change in total cost divided by the change in total product and thus is equal to the increase in total cost caused by an increase of one unit of output. That is the definition of marginal cost.

(6A): Will a change in fixed costs change average total cost?

(6A): yes --> A change in fixed costs changes average costs because average cost is total fixed cost plus total variable cost divided by amount of output. Thus, average cost will also change as fixed cost changes.

(6B): If the firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then the marginal cost of increasing production from 20 to 40 units is

(6B): $24.

(6B): Refer to the figure above. Total producer surplus received by the seller is (PICTURE 3)

(6B): 125

(6B): Refer to the figure above. What is the marginal cost of the 9th employee hour? (PICTURE 1)

(6B): 14

(6B): Refer to the figure above. When the pizza shop employs 3 workers per day, the pizza shop will collect total revenue of (PICTURE 5)

(6B): 1500

(6B): Refer to the figure above. What is the Total Fixed Cost when the firm produces 60 units of output? (PICTURE 2)

(6B): 240

(6B): Refer to the figure above. When the demand is P1 = $30, what is the total revenue? (PICTURE 2)

(6B): 2400

(6B): Refer to the figure above. The law of diminishing returns sets in after the ______________ worker per day. (PICTURE 5)

(6B): 3

(6B): Refer to the figure above. When the pizza shop employs 2 workers per day, it will experience a marginal cost of ______________ per pizza. (PICTURE 5)

(6B): 3

(6B): Refer to the chart above. What is John's reservation price for 4th and 5th hours of cleaning windows?(PICTURE 4)

(6B): 3.5 and 7 respectively

(6B): Refer to the figure above. Fixed cost for this firm is (PICTURE 1)

(6B): 50

(6B): Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats it produces per day depends on the number of employee-hours per day, shown in the table below: (PICTURE 7)

(6B): A tax of $10 per day would decrease Paducah's profit by $10 per day at every level of output. But the company would still maximize its profit by producing 20 bats per day. A tax that is independent of output does not change marginal cost, and hence does not change the profit-maximizing level of output.

(6B): Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats it produces per day depends on the number of employee-hours per day, shown in the table below: (PICTURE 7)

(6B): A tax of $2 per bat has exactly the same effect as any other $2 increase in the marginal cost of making each bat. That is, the marginal cost of producing the 15th bat is $8, but as soon as Paducah produces 5 more bats its marginal cost rises to $11, which is higher than the price of $10 per bat. Similarly, the next-to-last column of the table below shows that the company's profit-maximizing level of output falls to 15 bats per day since that is the only output level without a negative profit (loss).

(6B): Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats it produces per day depends on the number of employee-hours per day, shown in the table below: (PICTURE 7)

(6B): If the government imposes a tax of $10 per day on the company, then the company will have to pay the same amount each day regardless of how many bats it produces. In other words, the tax will increase the company's fixed cost, and as a result, it will not affect the company's profit-maximizing level of output. On the other hand, if the government imposes a tax of $2 per bat, then the marginal cost of producing each bat will increase, and as a result, the profit-maximizing number of bats will fall. Note that both taxes lower the firm's profit.

(6B): Fred runs a fishing lodge, and has a very successful business during the summer. In the fall, the number of guests at the lodge starts to decline, and by November very few people stay at Fred's Lodge. Fred should

(6B): Keep the lodge open only during those months in which revenues exceed the variable costs of serving guests.

(6B): what is the optimal supply of roadside litter?

(6B): The quantity of litter that would remain if trash were picked up until the marginal cost of picking up trash equaled the marginal benefit.

(6B): Why do we use the vertical interpretation of the supply curve when we measure producer's surplus?

(6B): We need to know the reservation price of sellers at every level of output in order to calculate producer surplus. The vertical interpretation of the supply curve tells us marginal cost at every level of output, and marginal cost is the reservation price of sellers.

(6B): Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats it produces per day depends on the number of employee-hours per day, shown in the table below: (PICTURE 7)

(6B): a. As indicated by the entries in the next-to-last column of the table above, the profit-maximizing quantity of bats for Paducah is 20 per day, which yields a daily profit of $35. The same result is also obtained by using the price-maximization rule: Price = Marginal cost. The last column shows the marginal cost at each output level. At 20 bats per day the marginal cost is $9, which is less than the price of $10, but if Paducah increases production to 25 bats per day the marginal cost rises to $12. Thus the profit-maximizing quantity is 20 bats per day

(6B): Refer to the figure above. At quantities less than 50 doughnuts, (PICTURE 6)

(6B): average cost is declining because marginal cost is less than average cost.

(6B): Refer to the figure below. When the demand is P2 = $15, this firm should ______________ (PICTURE 3)

(6B): continue to operate in the short run and think about shutting down in the long run

(6B): A firm's output price is $8 and the firm is producing 77 units with a marginal cost of $11. The firm should

(6B): decrease production

(6B): Refer to the figure above. When the demand is P3 = $10, this firm should ______________ (PICTURE 3)

(6B): discontinue operation in the short run since the firm is unable to cover variable costs.

(6B): One implication of the shape of the demand curve that faces a perfectly competitive firm is that

(6B): if the firm increases its price above the market price, it will earn zero revenue.

(6B): A firm's output price is $5 and the firm is producing 37 units with a marginal cost of $3. The firm should

(6B): increase production

(6B): When some factors of production are fixed, in order to increase production by equal amounts a firm would need to add

(6B): larger increases in the variable factor

(6B): Refer to the figure above. Given the cost functions shown, at an output of 100 doughnuts, average cost would be (PICTURE 6)

(6B): less than marginal cost

(6B): Your math professor has assigned 20 homework problems that are due next week. After working for an hour, you notice you have completed 4 problems. After another hour, you have completed 3 more problems. During the third hour, you finish 2 problems. What economic principle best explains this?

(6B): low hanging fruit principle: you competed the easiest problems first

(6B): In general, if the price of a fixed factor of production increases,

(6B): marginal costs are unchanged.

(6B): Refer to the figure above. Marginal Cost is upward sloping because (PICTURE 6)

(6B): marginal productivity of at least on input is declining

(6B): As the market price of a service increases, more people will decide to perform that service because

(6B): more people will find that the market price exceeds their reservation price.