ECON Notes - Joshua Collins
The domestic demand (QDD) for wheat in the United States is estimated to be QDD=1430−55P, where the quantity of wheat is measured in millions of bushels per year. Suppose China also demands U.S. wheat (QDC) and that its demand is given by QDC=2700−90P. What is the total demand for U.S. wheat, assuming the only two sources of demand are domestic and Chinese? The total demand for U.S. wheat is
QD=4130-145P for P(<-) $26 and QD=2700-90P for P (>) $26.
If all firms in a perfectly competitive market are identical, which of the following is NOT a condition for long-run equilibrium in that market?
Price is above average cost for all firms.
For the monopolist shown in the figure at right, the profit-maximizing level of output is
Q1.
Refer to the figure at right. The consumer surplus derived from pizza consumption is
$1,500 (lowest amount)
Suppose that there are 100 identical firms in this market. 1. Using the line drawing tool, draw the market supply curve on the figure to the right (representing the market). For simplicity, ignore the portion of the curve that corresponds to zero units of output. Label this curve 'S'. 2. What is producer surplus for this market? $
$1600 (intersection*x intercept of S) (400*4)
Refer to the figure at right. When the coffee farmer maximizes profit, how much is his profit?
$2,134 (highest)
Refer to the figure at right. The value of consumer surplus when price is $4 equals
$21 (lowest amount)
Refer to the figure at right. When profit is maximized, the total revenue of the farmer equals
$8,360 (highest)
Consider the Cobb-Douglas production function Q=10KL. (Enter your responses as functions of L.) (Useful formular: for y=(1/cx), y'=−(1/cx^2.) The isoquant equation for Q=1 is K= Its marginal rate of technical substitution as a function of L is MRTS= The isoquant equation for Q=2 is K= Its marginal rate of technical substitution as a function of L is MRTS= At the input combination L=0.5 and K=0.2, to keep the output a constant, the producer can increase the L input by 0.002 and simultaneously reduce the K input by
(1/10L) -(1/10L^2) (1/5L) -(1/5L^2) 0.0008
Refer to the figure at right. At what level of output does average total cost closest to marginal cost?
7 units of output (point of A)
HW 4
Notes
HW 5
Notes
HW 6
Notes
HW 7
Notes
HW 8
Notes
HW 9
Notes
Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit-maximization condition for the firm can be written as
P=MC.
1. Assume c=2. Derive the marginal product of health expenditures and the marginal product of nutrition expenditures. (Enter your responses as functions in terms of H and N) The marginal product of health expenditures (MPH) is and the marginal product of nutrition expenditures (MPN) is 2. Continue to assume c=2. The absolute value of the marginal rate of technical substitution is (suppose health expenditure is on the horizontal axis in the H-N plane.) (Enter your responses as functions in terms of H and N. No need to simplify, but a simplified answer is also accepted.) 4. Now supose that N and H. (Assume c continues to equal .) You run a charity that can provide either food aid or health aid to this country. Which would provide the greater benefit, increasing H by 1 or N by 1? (Hint: use the results in part 1.) Greater benefits would be provided by increasing expenditures on ______ by 1.
0.8H^-0.60N^0.60 1.2H^0.40N^-0.40 (0.8H^-0.60N^0.60/1.2H^0.40N^-0.40) Find Graph in HW 6 health
Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one can of Coke. Jon's marginal rate of substitution is equal to What conclusions can you draw about Jon's satisfaction-maximizing choices?
1 If the ratio of the price of Sprite to the price of Coke is greater than one, then Jon will only consume Coke.
If the wage rate 'w' is $40 and the cost of capital is $40, calculate the average cost of producing 2,000 units in the long-run. AC = $ In the short-run, with the amount of capital fixed at 40 units, average total cost of producing 2,000 units is ______ long-run average costs.
1.60 equal to
If the wage rate 'w' is $40 and the cost of capital is $40, calculate the average cost of producing 2,000 units in the long-run. AC = $ In the short-run, with the amount of capital fixed at 40 units, average total cost of producing 2,000 units is _________ long-run average costs.
1.60 equal to
Suppose Bob's utility function over wine and books is U=W0.4B0.6. He sets aside $1000 of his income per month to spend on his two hobbies, collecting wine and collecting books. The price of a book is $6. The initial price of wine is $40 per bottle. Solve for Bob's optimal bundle. Bob's optimal bundle consists of __ bottles of wine and ___ books. Let P denote the price of wine. Derive an Bob's demand function for wine. Bob's demand function for wine is W=
10, 100 (400/P)
Suppose Bob's utility function over wine and books is U=2W0.3B0.7. He sets aside $1000 of his income per month to spend on his two hobbies, collecting wine and collecting books. The price of a book is $14. The initial price of wine is $30 per bottle. Solve for Bob's optimal bundle. Bob's optimal bundle consists of __ bottles of wine and __ books. Let M denote Bob's monthly budget on wine and books. Derive an Bob's Engel curve function for wine. Bob's demand function for wine is W=
10, 50 (M/100)
Suppose that a competitive firm has a short-run total cost function of C(q)=418+15q+2q^2. Suppose the market price is P=$139 per unit. 1. Find the firm's marginal cost and average variable cost functions. The firm's marginal cost function is MC(q) = The firm's average variable cost function is AVC(q) = 2. What is the firm minimum average variable cost? Should the firm shut down in the short run? The firm's minimum average variable cost is ___ Given the minimum average variable cost and the current market price, the firm 3. Find the level of output produced by the firm and the maximum level of profit. The level of output produced by the firm is q= ___ units. The firm's profit is π=$
15+4q 15+2q 15 should continue to produce a positive level of output 31 1,504
Refer to the figures at right. The figures depict the individual demands of the only three consumers in the market for good X. After constructing the market demand curve, we determine that quantity demanded at a price of $10,000 is
17 units.
Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C=500+2q2, where q is the level of output and C is total cost. (The marginal cost of production, MC(q), is 4q; the fixed cost, FC, is $500). If the price of a watch is $80, how many watches should you produce to maximize profits? You should produce ____ watches. What will the profit level be? Profit will be $____ At what minimum price will the firm produce a positive output? In the short run, the firm will produce if price is greater than ____ per watch.
20 300 0
When Ajax Co. produced 3 units of output per week, its total fixed cost was $150 and total variable cost was $45. When output increased to 4 units per week, total fixed cost remained at $150 and total variable cost increased to $60. When output was 4 units per week, total cost was $ When output was 4 units per week, average variable cost was $ When output was 4 units per week, average fixed cost was $ When output was 4 units per week, average total cost was $ The marginal cost of producing the fourth units was $
210 (150+60) 15.00 (60-45) 37.50 (150/4) 52.50 (37.50+15) 15.00
Holding capital constant, when labor increases from 9 to 10 units, output increases from 191 to 213 units. The marginal product of labor is ___ units, and when 10 units of labor are used, the average product of labor is ___ units.
22, 21.3
Suppose that a firm's production function is: q=10L^0.5K^0.5. Using calculus, we know that its marginal product functions are: MPL=5K0.5/L0.5=0.5q/L and MPK=5L0.5/K0.5=0.5q/K. The cost of a unit of labor, w, is $80 and the cost of a unit of capital, r, is $20. The isoquants for output of 140 and 280 are illustrated in the figure to the right. 1. Initially, the firm is producing 140 units of output and has determined that the cost-minimizing quantities of labor and capital are 7 and 28, respectively. Suppose now that the firm wants to increase output to 280 units. If capital is fixed in the short run, how much labor will the firm require? The firm will now require ___ units of labor. 2. The firm's marginal rate of technical substitution is MRTS= Hence, the tangency condition is In addition, to be able to produce 280 units of output, K and L must also satisfy Solving the two equations above gives that the optimal combination of capital and labor required to produce the 280 units of output is ___ units of capital and ___ units of labor. Does the short-cut for Cobb-Douglas function to solve for optimal bundle applies here?
28 (K/L) (K/L) = (80/20) 280=10L^0.5K^0.5 56, 14 Yes Find Graph in HW 7
Suppose Charles owns a lawn-mowing company. Assume that without workers, no yards are mowed. When he hires one worker, he is able to mow 3 yards per day. With two workers, he can mow 8 yards per day, and with three workers, he can mow 14 yards per day. The marginal product of the first worker is __ yards per day. The marginal product of the second worker is __ yards per day. Last, the marginal product of the third worker is __ yards per day. The marginal product of labor potentially increases (from one to three workers) due to _________.
3 5 6 specialization
Suppose that a competitive firm's marginal cost of producing output q (MC) is given by MC(q)=6+2q. The average variable cost of the firm (AVC) is given by AVC(q)=6+1q. Suppose that the firm's fixed costs (FC) are known to be $50. Assume that the market price (P) of the firm's product is $12. 1. What level of output (q) will the firm produce? The firm will produce ___ units of output. 2. Will the firm be earning a positive, negative, or zero profit in the short run? In the short run, the firm's profit will be
3 (6/2) negative
The marginal product of labor in the production of computer chips is 30 chips per hour. The marginal rate of technical substitution (MRTS) of hours of labor for hours of machine capital is 0.10. What is the marginal product of capital? The marginal product of capital is ___ chips per hour.
300
For simplicity, suppose a pizza parlor has only the following production costs: $4 in labor per pizza, and $1,000 in restaurant rent per month. Assume the pizza parlor produces Q pizzas per month. Enter your response as a function of Q for each of the following blanks. Note that a constant can be seen as a special function of Q where the coefficient of Q is zero. 1. What are the short-run variable cost, fixed cost, and total cost of production (per month)? The variable cost of production is VC(Q)= The fixed cost of production is FC(Q)= The total cost function is TC(Q)= 2. What are the short-run average variable cost, average fixed cost, and average total cost of production? The average variable cost is AVC(Q)= The average fixed cost is AFC(Q)= The average total cost function is ATC(Q)= 3. What is the short-rum marginal cost of production? The marginal cost is MC(Q)=
4Q 1,000 1,000 + 4Q 4 (1,000/Q) (1,000/Q) + 4 4
Assume that the market price for apples is $22.00 per box. What is the profit-maximizing quantity for apple growers to produce? ___ boxes. At this level of output, profit will be $ Apple growers will earn positive economic profit in the short run at any market price above $ ___ per box.
75 (ATC right of intersection) 900 (MC) (75*12) (farthest left of intersection*farthest right of intersection) 8 (intersection)
In the diagram on the right the consumer's original budget line is L1, and the consumer buys the amount of good X at point A. Then the price of good X increases dramatically so that the consumer's new budget line shifts to L2. After the price increase the consumer buys the amount of good X at point C. The substitution effect due to the price change is the movement from point ___ to point ___. The income effect due to the price change is the movement from point ___ to point ___. Based on the income effect, good X is _________ good.
A, B B, C a normal
Convex isoquant (B) Linear isoquant (A) L-shaped isoquant (C)
A. The slope, or the MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input and output can be maintained. The inputs are perfect substitutes. B. Within some range, a declining number of units of one input can be substituted for a unit of the other input, and output can be maintained at the same level. In this case, the MRTS is diminishing as we move down along the isoquant. C. The inputs are perfect complements, or that the firm is producing under a fixed proportions type of technology. In this case, the firm cannot give up one input in exchange for the other and still maintain the same level of output.
Assuming that the analysis of T-Mobile and Sprint executives is correct and that the two firms don't merge, _______ represents the long-run average cost curve for AT&T or Verizon and _______ represents the long-run average cost curve for T-Mobile or Sprint. If the firms do merge, the newly-merged firm Assuming again that the analysis of T-Mobile and Sprint executives is correct, if the federal government decides to stop their merger, what is likely to happen to the firms once the infrastructure for 5G wireless technology has been completed?
ATC2; ATC1; becomes similar in size toAT&T and itslong-run average cost would decrease to the level ofAT&T's cost. T-Mobile and Sprint will have higher costs than AT&T or Verizon and they may be driven out of business.
When capital is plotted on the vertical axis and labor is plotted along the horizontal axis, the marginal rate of technical substitution (MRTS) of labor for capital along a convex isoquant
All of the above are correct.
Which of the following does not create a barrier to entry?
All of the above create barriers to entry.
What is the long run?
An amount of time needed to make all production inputs variable.
Suppose that a firm's production function is q=10x0.5 in the short run, where there are fixed costs of $1,500, and x is the variable input whose cost is $2500 per unit. What is the total cost of producing a level of output q? In other words, identify the total cost function C(q). The total cost of producing a level of output q is ___ Write down the equation for the supply curve. The supply curve is ___ If price is $800, how many units will the firm produce? The firm will produce ___ units of output. What is the level of profit? Profit equals $ ___
C(q) = 1,500 + (2500q^2/100) P = 50q 16 4,900 Find Graph in HW 8
The figure illustrates the short-run cost curves for a company that produces cell phones. Identify the average total cost curve (ATC), the average variable cost curve (AVC), the average fixed cost curve (AFC), and the marginal cost curve (MC) in the figure. The ATC curve is ___, the AVC curve is ___, the AFC curve is ___, and the MC curve is ___.
C3, C2, C1, C4
What do economists call the problem she is describing? What are its implications for the marginal product of labor for cooks? Do restaurant owners have a solution to this problem in the long run? Briefly explain.
Diminishing marginal returns, where additional cooks produce less additional output. Yes, restaurant owners can vary the size, or number, of kitchens.
After reading this article, a student remarks: "It seems that Wells Fargo is suffering from diminishing returns to capital." Briefly explain whether you agree with this remark.
Disagree: the student confused diminishing returns to capital with diseconomies of scale.
What is the difference between economic profit and producer surplus?
Economic profit includes fixed costs as part of the total costs, but producer surplus does not.
Left shoes and right shoes are perfect complements. Draw the appropriate price-consumption curve (for a variable price of right shoes) and the income-consumption curve.
Find Graph in HW 5
Suppose that you, Julio, and Yixiu constitute the market for DVDs. Your demand for DVDs is illustrated in the graph to the right (D1), along with Julio's demand (D2) and Yixiu's demand (D3). Using the line drawing tool, construct the market demand curve for DVDs. To do this, you will need to use three line segments labeled Dsegment 1, Dsegment 2, and Dsegment 3.
Find Graph in HW 5
Consider the production of slices of pizza. The average total cost (ATC) and average fixed cost (AFC) of producing slices of pizza are illustrated in the graph to the right. Use the four-point curve drawing tool to graph the average variable cost of producing one, two, three, and four thousand slices of pizza. Properly label this curve.
Find Graph in HW 7
1.) Using the line drawing tool, draw a budget line when the price of wine is $15 per bottle. Label this line L1. 2.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'A'. 3.) Using the line drawing tool, draw a budget line when the price of wine is $30 per bottle. Label this line L2. 4.) Using the point drawing tool, then add the corresponding satisfaction-maximizing bundle. Label this point 'B'. 5.) Using the line drawing tool, draw a budget line when the price of wine is $60 per bottle. Label this line L3. 6.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'C'. 7.) Using either the line drawing tool or the three-point curved drawing tool, plot the price-consumption curve. Label this curve 'Price-Consumption Curve'.
Find in HW 4
1.) Using the line drawing tool, first draw a budget line when income is $2,000. Label this line L1. 2.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'A'. 3.) Using the line drawing tool, draw a budget line when income is $4,000. Label this line L2. 4.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'B'. 5.) Using the line drawing tool, draw a budget line when income is $6,000. Label this line L3. 6.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'C'. 7.) Using the three-point curved line drawing tool, plot the income-consumption curve. Label this curve 'Income-Consumption Curve'.
Find in HW 4
Using the three-point curved line drawing tool, draw the Engel curve for food. Label this curve 'Engel Curve'.
Find in HW 4
Using the three-point curved line drawing tool, draw the demand curve for wine in the figure to the right. Label this curve 'Demand'.
Find in HW 4
Refer to the figure above. In this exercise we check the fact that the vertical distance between the two budget lines B1 and B2 is the tax proceeds at the corresponding amount of gasoline consumed.
Find in HW 5
Suppose there are 200 identical consumers in the market for cigarettes. Each consumer's demand for cigarettes is given by Qi=10−2P where Qi is the packs of cigarettes smoked by consumer i per day and P is the price per pack.
Find in HW 5
The demand for apples in the United States is QUS=800−20P, and foreign demand for apples is QF=1200−80P, where quantity demanded is measured in millions of bushels and price is in dollars per bushel. The US and foreign demand together compose the world demand for apples.
Find in HW 5
Use the multipoint curve drawing tool to draw the total product curve for all units of labor (0 − 7). Properly label this curve.
Find in HW 6
Using the 3-point curved line drawing tool, draw a second isoquant that doubles output using a production function that exhibits increasing returns to scale. Label your curve 'q = 200.'
Find in HW 6
Using the 3-point curved line drawing tool, draw a second isoquant that doubles output using a production function that exhibits increasing returns to scale. Label your curve 'q = 200.'
Find in HW 6
Why do firms tend to experience decreasing returns to scale at high levels of output?
Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output.
What can you say about Jane's preferences? Identify the income and substitution effects with respect to good X that result from a change in the price of good X. When the price of good X decreases, Jane's substitution effect (in terms of good X) is __ units of good X and her income effect is __ units of good X.
Good X and good Y are perfect complements for Jane. Jane always consumes good X and good Y in fixed proportions. (Both A and B are correct.) 0, 6 Find Graph in HW 5
For which of the following goods would a 10 percent price increase lead to the largest income effect for most consumers?
Housing
A perfectly competitive firm is producing the output that maximizes its profit. If its fixed cost increases, and industry price remains constant, how should it respond in the short run?
It should keep output the same.
If Jill expects to produce 300 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain. If Jill expects to produce 900 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain. A student asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces 1,100 pizzas per week, why isn't it also lower when Jill produces 500 per week?" Give a brief answer to the student's question.
Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant. Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant. The larger restaurant has higher fixed costs than the smaller restaurant.
When Joe maximizes utility, he finds that his |MRS| of X for Y is greater than Px/Py. It is most likely that
Joe is not consuming good Y.
Which of the following industries is likely to be perfectly competitive?
Lawn care
A competitive firm has the following short-run cost function: C(q)=1q3−8q2+32q+3. Find marginal cost (MC), average cost (AC), and average variable cost (AVC). Marginal cost is ___ Average cost is ___ Average variable cost is ___ The marginal cost, average cost, and average variable cost curves are illustrated in the figure to the right. The marginal cost curve is ____, the average cost curve is ____, and the average variable cost curve is ____. At what range of prices will the firm supply zero output? The firm will supply zero output at prices below $___ Identify the supply curve on the graph. The supply curve is ___ At what price would the firm supply exactly 6 units of output? The firm would supply 6 units of output at a price of $ ___
MC = 3q^2-16q+32 AC = 1q^2-8q+32+(3/q) AVC = 1q^2-8q+32 C1, C3, C2 16 the portion of the marginal cost curve above minimum average variable cost 44 Find Graph in HW 8
You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted PY for frozen yogurt and PIC for ice cream. Under what condition will you only consume frozen yogurt?
MRS is less than PIC/PY.
A firm produces a product in a competitive industry and has a total cost function (TC) of TC(q)=100+4q+2q^2 and a marginal cost function (MC) of MC(q)=4+4q. At the given market price (P) of $18, the firm is producing 5.00 units of output. Is the firm maximizing profit?
No
Does it make sense to consider the returns to scale of a production function in the short run?
No, we cannot change all of the production inputs in the short run.
Suppose the supply curve for a good is completely inelastic. If the government imposed a price ceiling below the market-clearing price, would a deadweight loss result? Explain.
No. Since the supply curve is vertical, the market-clearing quantity supplied and the price-ceiling quantity supplied are the same. Thus, the entire loss of producer surplus is transferred to consumers and there is no deadweight loss.
HW 10
Notes
Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package?
She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.
Why does production eventually experience diminishing marginal returns to labor in the short run?
Since at least one factor of production is fixed in the short run, as more and more workers must share the fixed factors, the marginal product of each additional worker will eventually decrease.
Refer to the figure at right. After the increase in demand, from D1 to D2 in panel (b), and being this a constant-cost industry, what is likely to happen in the market?
Supply will shift to S2, and the market will settle in equilibrium at point C.
Explain the term "marginal rate of technical substitution." (Assume a two-input production function.) What does a MRTS = 6 mean? It means that if the input on the horizontal axis is increased by one unit, then the input on the vertical axis __________ by 6 units and output will __________.
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. decreases, not change
Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?
The firm produces more than the optimal quantity and earns lower profits.
The graph to the right illustrates the average product of labor. Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the graph?
The marginal product of labor initially increases due to division of labor and then decreases due to diminishing returns. Whenever the marginal product of labor is greater than the average product of labor, it pulls the average product of labor up. (Both a and b.)
In tracing out a price-consumption curve (PCC) for good X, which of the following variables is held constant?
The prices of other goods.
Refer to the figure at right. In long-run equilibrium, how much is the economic profit of the firm expected to be?
Zero
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.
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.
The gasoline tax-and-rebate policy example discussed in the lecture is
a combination of price and income changes.
An individual firm's demand curve in perfect competition is
a horizontal line at the market price.
To model the input decisions for a production system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run, labor is a variable input and capital is fixed. The short-run expansion path for this production system is
a horizontal line.
Given the income-consumption curve shown to the right. Good-X is ______ good and good Y is _______
a normal inferior
A price taker is
a perfectly competitive firm a firm that cannot influence the market price (both C and D.)
In long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true? All firms in perfectly competitive industries earn zero economic profit in the long run because
a positive profit would induce firms to enter, decreasing price and profit, and a negative profit would induce firms to exit, increasing price and profit.
A price ceiling set below the equilibrium price in a perfectly competitive market
always reduces producer surplus and may or may not increase consumer surplus.
At the point where average variable cost reaches its minimum value
average variable cost equals marginal cost.
Refer to the figure at right. Producer surplus in the figure equals the area
below market price and above the supply curve.
A perfectly competitive firm is currently maximizing profit. If the cost of raw materials increases, the firm should
decrease output
With increasing returns to scale, isoquants for unit increases in output become
closer and closer together.
The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called
consumer surplus.
In a perfectly competitive market in which no market failure occurs and no government policy interferes with the equilibrium price and quantity,
deadweight loss is zero the sum of producer and consumer surplus is maximized (A and B are correct.)
Did Bill's utility increase or decrease between week 1 and week 2? Bill's utility between week 1 and week 2 Did Bill's utility increase or decrease between week 1 and week 3? Bill's utility between week 1 and week 3
decreases because in week 2 the price of good X increases but Bill's income did not change. increases because Bill's increase in income is more than enough to purchase bundle A in week 3. Find Graph in HW 5
In a production process, all inputs are increased by 10% but output increases less than 10%. This means that the firm experiences
decreasing returns to scale.
How can a price ceiling make consumers worse off? Under what conditions might it make them better off? A price ceiling will typically make consumers worse off when
demand is inelastic and supply is relatively elastic and will make them better off when demand is elastic and supply is relatively inelastic.
A firm can hire only full-time employees to produce its output, or it can hire some combination of full-time and part-time employees. For each full-time worker let go, the firm must hire an increasing number of temporary employees to maintain the same level of output. The firm's marginal rate of technical substitution is A firm finds that it can always trade five units of labor for one unit of capital and still keep output constant. The firm's marginal rate of technical substitution is A firm requires exactly four full-time workers to operate each piece of machinery in the factory. The firm's marginal rate of technical substitution is
diminishing constant undefined or zero Find Graph in HW 6
Suppose the company produces 9 thousand motors per month. Is it experiencing economies of scale, diseconomies of scale, or constant returns to scale? If the company produces 9 thousand motors, then it experiences At what level of output does the firm experience the minimum efficient scale? The minimum efficient scale occurs when the firm produces __ thousand motors.
diseconomies of scale 5 (lowest point of parabola)
An improvement in technology would result in
downward shifts of MC and increases in output.
Refer to the figure at right. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that
food is a Giffen good and clothing a normal good.
Refer to the figure at right. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that
food is an inferior good and clothing is a normal good.
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ____________ price and sell a ___________ quantity.
higher; smaller
The income-consumption curve
illustrates the utility-maximizing combinations of goods associated with every income level.
Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output. How does this tax affect the firm's fixed, marginal, and average costs? With a lump-sum tax, the fixed cost of production will __________; the marginal cost of production will ___________; and the average cost of production will _________. Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firm's fixed, marginal, and average costs? With a proportional tax, the fixed cost of production will _________; the marginal cost of production will __________; and the average cost of production will __________.
increase, remain unchanged, increase remain unchanged, increase, increase
Did Mary's utility increase or decrease between week 1 and week 3? Mary's utility between week 1 and week 3 Does Mary consider both goods to be normal goods?
increases because Mary's increase in income is exactly enough to purchase bundle A in week 3. Mary considers good X to be a normal good and good Y to be an inferior good. Find Graph in HW 5
The production function q=22K^0.6L^0.6 exhibits
increasing returns to scale.
Refer to the figure at right. An increase in production from q1 to q2
is more costly in the short run than in the long run.
Consumer surplus
is the area under the demand curve and above price.
A Giffen good
is the special subset of inferior goods in which the income effect dominates the substitution effect.
If a competitive firm's marginal cost curve is U-shaped, then, for any positive quantity supplied,
its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve.
When the price of good X increases and all goods (including X) are normal goods, the income effect leads consumers to buy
less of all goods.
When the price of good X increases, the substitution effect leads consumers to buy
less of good X and more of substitute goods.
Refer to the figure at right. The minimum variable cost of the firms in this competitive market is
lower for firm 3
The gasoline tax-and-rebate policy example discussed in the lecture
makes the representative consumer worse off because the rebate only partially offsets the income effect of the price increase. causes the consumer to buy less gasoline. (Both B and D are correct.)
Marginal profit is equal to
marginal revenue minus marginal cost.
Let MPK be the marginal product of capital, MPL be the marginal product of labor, r be the price of capital, w be the cost of labor, and MRTS be the marginal rate of technical substitution. The firm is If not, how could the firm decrease the cost of production holding output constant? The firm could decrease the cost of production holding output constant by using more ______ and less _______.
not minimizing the cost of production because (MPK/r)<(MPL/w). labor, capital
Refer to the graph. From the origin up until point A, From point A up until point B,
output increases at an increasing rate. output increases at a decreasing rate.
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,
parents have a more difficult time finding day care providers for their children.
A perfectly competitive firm should shut down in the short run if
price is below minimum average variable cost.
Refer to the figure at right. The firm in this situation should decide to
produce at a loss
Suppose that the market price is above the minimum level of the short-run average variable cost of a perfectly competitive firm. Then, in the short-run, the firm maximizes its profit by
producing the output at which marginal cost equals the market price.
Refer to the figure at right. Suppose initially the market price equals $40. The long-run level of output will be
q2.
A perfectly competitive firm's marginal cost function is MC = 60+3q. The firm's short-run supply curve for P>AVCmin is
q = −20+0.33P. (lower of 60, negative)
A perfectly competitive firm's marginal cost function is MC = 75 + 3q. The firm's short-run supply curve is
q = −25+0.33P. (lower of 75, negative)
Suppose that the price of a good decreased. The substitution effect shows the change in consumption for all goods in reaction to a change in ____________ holding __________ constant. The income effect shows the change in consumption for all goods in reaction to a change in ____________ holding ___________ constant.
relative prices, utility purchasing power, relative prices
Mulally meant that Chinese firms We can predict that, as the Chinese automobile industry develops over the next 10 years, there should be
that aren't producing at minimum efficient scale will have higher costs than their competitors. fewer firms in the industry and the remaining firms will likely be larger.
An Engel curve is backward-bending when
the good is inferior after a certain level of income.
The change in demand resulting from the change in real purchasing power is called
the income effect.
When the cost minimizing combination of inputs is being used and there is no corner solution,
the isoquant line is tangent to the isocost line.
Using the Lerner Index of Monopoly Power,
the less elastic a firm's demand, the greater is its monopoly power.
What is minimum efficient scale? Minimum efficient scale is What is likely to happen in the long run to firms that do not reach minimum efficient scale? A firm that does not reach its minimum efficient scale
the level of output at which all economies of scale are exhausted. will lose money if it remains in business.
When the optimal point on an indifference curve and budget line diagram is a corner solution,
the marginal rate of substitution usually does not equal the ratio of prices for the two goods.
The horizontal summation of the demands of each consumer at different price levels is called
the market demand curve.
When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this, we can infer that
the minimum value of the firm's average variable cost lies between $5 and $10.
If a consumer must spend her entire income on some combination of two commodities and chooses to spend it all on just one of the commodities, then
the other commodity generates less utility per dollar spent on the good.
Assuming no fixed costs are avoidable in the short run, a perfectly competitive firm's short-run supply curve is
the portion of its marginal cost curve that lies above its average variable cost curve, plus the portion of the vertival axis that lies below the minimum average variable cost.
A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as
the substitution effect.
At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because
there are at least as many possibilities for substitution between factors of production in the long run as in the short run.
In the short run when some inputs are fixed, marginal cost must eventually rise as a firm's output increases because
there will eventually be diminishing marginal products for the firm's variable inputs.
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed? Economies of scale happen when the firm's long run average total cost ________ as output increases.
the long-run average cost curve decreases
If input prices are constant in the long run, a firm with decreasing returns to scale can expect
total costs to increase by more than double when output doubles.
Assume the statement refers to good X with price PX, where good X is measured on the horizontal axis of an indifference map and good Y is measured on the vertical axis. This statement is The level of utility increases as an individual moves downward along the demand curve. This statement is Engel curves always slope upward. This statement is
true because the MRS equals (PX/PY), which decreases as an individual moves downward along the demand curve. true because price decreases pivot the budget line outward. false because Engel curves slope downward for inferior goods.
An increase in the demand for movies also increases the salaries of actors and actresses. Is the long-run supply curve for movies likely to be horizontal or upward sloping? Explain. If an increase in the demand for movies also increases the salaries of actors and actresses, then the long-run supply curve for movies is likely to be
upward sloping because the input supply curve is upward sloping.
A firm uses 80 hours of labor and 6 units of capital to produce 10,000 gadgets per day. Labor's marginal product is 4 gadgets per hour and the marginal product of capital is 20 gadgets per unit. Each unit of labor costs $8 per hour and each unit of capital costs $50 per unit. If the firm wants to continue producing 10,000 gadgets per day at the lowest possible cost, it should
use more labor and less capital.
What are diseconomies of scale? Diseconomies of scale is What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
when a firm's long-run average costs increase with output. Firms have difficulty coordinating production.
Is the firm's expansion path always a straight line? A firm's expansion path
will not be a straight line if the ratio of inputs used changes with output.
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 Why might you expect the marginal product of additional workers to diminish eventually? Eventually, as successive workers continue to be added to the production process,
workers can specialize at a separate task, and output will increase at an increasing rate. they may no longer be able to specialize, and output will increase at a diminishing rate.
If all sellers charge the same price for the vacuum cleaner, will they all earn zero economic profit in the long run? If all sellers charge the same price, then in the long run they will all earn If all sellers charge the same price and one local seller owns the building in which he does business, paying no rent, is this seller earning a positive economic profit? The seller who owns his building would earn Does the seller who pays no rent have an incentive to lower the price that he charges for the vaccuum cleaner? The seller
zero economic profit or else firms would enter or exit the industry. zero economic profit because the building would have an opportunity cost. has no incentive to lower price because he can sell all he wants at the market price.
Refer to the figure at right. When the farmer's profit is maximized, total cost equals
$6,226 (highest)
A decreasing-cost industry has a downward-sloping
long-run industry supply curve.
