Chapter 6 Study Practice

All of the followings are factors in a firm's elasticity of supply except? labor market price time inventories

market price because that only influences the decisions of buyers. Market price does not affect the elasticity of supply because market price only directly impacts quantity supplied as it moves up the supply curve.

If firms are perfectly competitive, the equilibrium price in the long run will be what?

ATC is taking the total cost of producing whatever amount by the amount that you need to produce.

(continuation of last #) What is the market level quantity supplied given the market price is $2.50?

From the last question, they said asked for the avc for a firm that produces 2 widgets. Now the marginal cost for 2 widgets was $2 which is less than the market price of $2.50. The mc they gave for the third widget was $3 which is above the market price meaning they wouldn't be making a profit. Since it's asking what is the market level, meaning the level of quantity of all the firms which they specifically say is 5, you have to multiply 5 by the amount of widgets the firm will make that can guarantee them profit which is 2 widgets. 2 x 5 = 10 so the answer is 10 widgets.

(continuation of last #) Suppose the market level demand is fixed at 18. In other words, there is perfectly inelastic demand. What is the equilibrium price in the short run?$7, $10, $12?

If the market supply is 18, then that means the 5 firms need to be making that amount all together. So if there's 5 firms, each will have to supply either 3 or 4 widgets (3 * 5 = 15, 4 *5 = 20, this is the range). Since it gives the answer choices, lets compare the marginal costs of each widget so it matches the price. Once again this is the profit maximizing level which is also the price line (MR = D= AR = P)

You are one of 5 identical firms​ (i.e., you all have the same​ costs) that sell widgets. Each day you have a fixed cost of​ $9 to operate. The marginal cost of your first widget is​ $1; second is​ $2; third​ $3; fourth​ $7; and for the fifth it is​ $8. You have a capacity constraint of​ 5, and you can only produce a whole number of widgets. What's the AVC for a firm that produces 2 widgets?

In order to determine what your variable cost is for a certain output, you need to add up the marginal costs for everything before that and then add that to the given fixed costs. Since it's asking for avc, you'll have to divide the variable cost with the amount of widgets you are selling.

If the government promises to buy ventilators at an above market price, will the production increase?

It will because the law of supply says that if someone is willing to pay higher than the market price, then suppliers will also increase their level of production since they're moving along the supply line.

You're spending $30 to go see your favorite musician however you start having doubts because of an upcoming exam the next day. You later notice that there's a mistake on the credit card statement and that you paid $20 instead of $30. Will this influence your decision your final decision?

No it will not because you already paid the 20 dollars which is not recoverable which is also known as a sunk cost. Therefore it will not impact your decision.

Is the producer surplus same as the profit?

Producer surplus is equal to profit only when the marginal cost and the ATC can be represented too. Producer surplus is the difference between the price the consumer pays and the supply curve which is also the MC curve. Profit is the difference between price of the good and the ATC of that one good. Therefore both ATC and MC need to be represented.

A firm is experiencing economies of scale when ____ declines as more output is produced.

The ATC will decline when a firm is experiencing economies of scale. When a firm is undergoing economies of scale, it means that the ATC for each unit is decreasing with the increase in scale of magnitude of the output mostly due to capital.

The government decides to give a large amount of money with no strings attached. Will ventilator production increase?

This will not impact their MR or MC meaning production will remain unchanged.