Microeconomics Unit Three Exam Notes Sheet
This table shows price and quantity produced for a single firm in a perfectly competitive market. Price Quantity $10 23 $10 24 $10 25 $10 26 Given the information in the table shown, what is the average revenue when 24 units are produced?
$10
Total Revenue
-The amount a firm receives for the sale of its output -Equals the quantity of output the firm produces times the price at which it sells its output (PxQ=TR) EX: Caroline produces 10,000 cookies and sells them at $2 a cookie, her total revenue is $20,000.
Which of the following statements is true? a. All costs are fixed in the short run. b. All costs are variable in the long run. c. All costs are variable in the short run. d. All costs are fixed in the long run.
All costs are variable in the long run.
Fixed Costs
Costs that do not vary with the quantity of output produced EX: fixed costs include any rent he pays because this cost is the same regardless of how much coffee he produces.
*Use the following information to answer the following question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory factory for $40,000 per year. The accounting profit at Madelyn's pottery factory is A. $30,000 B. $35,000 C. $70,000 D. $75,000 E. $80,000
D. $75,000
Implicit Costs
Input costs that do not require an outlay of money by the firm
Explicit Costs
Input costs that require an outlay of money by the firm
The profit-maximizing level of output for any firm in a perfectly competitive market is to produce where:
MC = MR.
If marginal costs equal average total costs,
average total costs are minimized.
If the market price falls below a firm's minimum average total cost, the firm should:
consider how to minimize its losses.
An example of a standardized good is:
grain
Which of the following is a variable cost in the short run? a. rent on the factory b. wages paid to factory labour c. interest payments on borrowed financial capital d. payment on the lease for factory equipment e. salaries paid to upper management.
wages paid to factory labor.
If a firm in a perfectly competitive market is producing at a level of output where marginal costs exceed marginal revenue, its profits:
will increase if it produces less.
This table shows the total costs for various levels of output for a firm operating in a perfectly competitive market. Price Quantity TC $50 0 $10.00 $50 1 $20.00 $50 2 $27.50 $50 3 $77.50 $50 4 $147.50 $50 5 $250.00 According to the table shown, fixed costs must be:
$10
This table shows the total costs for various levels of output for a firm operating in a perfectly competitive market. Price Quantity TC $50 0 $10.00 $50 1 $20.00 $50 2 $27.50 $50 3 $77.50 $50 4 $147.50 $50 5 $250.00 According to the table shown, what is the firm's total revenue when 4 units are produced?
$200
Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Nicole can work at a competing pottery factory for €40,000 per year. The economic profit at Nicole's pottery factory is a.€80,000. b.€30,000. c.€75,000. d.€70,000. e.€35,000.
$30,000.
This table shows the total costs for various levels of output for a firm operating in a perfectly competitive market. Price Quantity TC $50 0 $10.00 $50 1 $20.00 $50 2 $27.50 $50 3 $77.50 $50 4 $147.50 $50 5 $250.00 According to the table shown, what is the market price?
$50
Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The accounting profit at Nicole's pottery factory is a.€30,000. b.€35,000. c.€75,000. d.€70,000. e.€80,000.
$75,000.
The cost curves shown here share the three properties that are most important to remember:
- Marginal cost eventually rises with the quantity of output. - The average-total-cost curve is U-shaped. - The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
*Use the following information to answer the following question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory factory for $40,000 per year. The economic profit at Madelyn's pottery factory is A. $30,000 B. $35,000 C. $70,000 D. $75,000 E. $80,000
A. $30,000
The efficient scale of production is the quantity of output that minimizes A. Average total cost B. Marginal cost C. Average fixed cost D. Average variable cost
A. Average total cost
If a production function exhibits diminishing marginal product, its slope A. Becomes flatter as the quantity of the input increases B. Becomes steeper as the quantity of the input increases C. Is linear (a straight line) D. Could be any of the above
A. Becomes flatter as the quantity of the input increases
In the long run, if a small factory were to expand its scale of operations, it is likely that it would initially experience A. Economies of scale B. Constant returns to scale C. Diseconomies of scale D. An increase in average total costs
A. Economies of scale
Which of the following is a variable cost in the short run? A. Wages paid to factory B. Payment on the lease for factory equipment C. Rent on the factory D. Interest payments on borrowed financial capital E. Salaries paid to upper management
A. Wages paid to factory
If there are implicit costs of production, A. economic profit will exceed accounting profit B. Accounting profit will exceed economic profit C. Economic profit and accounting profit will be equal D. Economic profit will always be zero E. Accounting profit will always be zero
B. Accounting profit will exceed economic profit
Which of the following statements is true? A. All costs are fixed in the long run B. Al costs are variable in the long run C. All costs are fixed in the short run D. All costs are variable in the short run
B. All costs are variable in the long run
When marginal costs are below average total costs, A. Average fixed costs are rising B. Average total costs are falling C. Average total costs are rising D. Average total costs are minimized
B. Average total costs are falling
If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will A. Slope upward B. Be U-shaped C. Slope downward D. Be flat (horizontal)
B. Be U-shaped
If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve A. Becomes flatter as the quantity of the input increases B. Becomes steeper as the quantity of the input increases C. Is linear (a straight line) D. Could be any of the above
B. Becomes steeper as the quantity of the input increases
Accounting profit is equal to total revenue minus A. Implicit costs B. Explicit costs C. The sum of implicit and explicit costs D. Marginal costs E. Variable costs
B. Explicit costs
*Use the following information to answer the following questions Number of Workers ----Output 0 0 1 23 2 40 3 50 The marginal product of labor as production moves from employing one worker to employing two workers is A. 0 B. 10 C. 17 D. 23 E. 40
C. 17
If marginal costs equal equal average total costs, A. Average total costs are rising B. Average total costs are falling C. Average total costs are rising D. Average total costs are minimized
C. Average total costs are rising
*Use the following information to answer the following questions Number of Workers ----Output 0 0 1 23 2 40 3 50 The production process described above exhibits A. Constant marginal product of labor B. Increasing marginal product of labor C. Diminishing marginal product of labor D. Increasing returns
C. Diminishing marginal product of labor
Economic profit is equal to total revenue minus A. Implicit costs B. Explicit costs C. The sum of implicit and explicit costs D. Marginal costs E. Variable costs
C. The sum of implicit and explicit costs
Variable Costs
Costs that vary with the quantity of output produced EX: variable costs include the cost of coffee beans, milk, sugar, and paper cups... the salaries of these workers are variable costs.
Overview
Explicit costs Costs that require an outlay of money by the firm Implicit costs Costs that do not require an outlay of money by the firm Fixed costs Costs that do not vary with the quantity of output produced FC Variable costs Costs that vary with the quantity of output produced VC Total cost The market value of all the inputs that a firm uses in production TC= FC+ VC Average fixed cost Fixed cost divided by the quantity of output AFC= FC/Q Average variable cost Variable cost divided by the quantity of output AVC= VC/Q Average total cost Total cost divided by the quantity of output ATC= TC/Q Marginal cost The increase in total cost that arises from an extra unit of production MC= Δ TC/Δ Q
Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they intersect where they do.
Figure 6 shows the marginal-cost curve and the average-total-cost curve for a typical firm. It has three main features: (1) marginal cost is rising; (2) average total cost is U-shaped; and (3) whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising. Marginal cost is rising for output greater than a certain quantity because in the short run the firm must hire additional labor to produce more output without being able to buy additional equipment. The average total cost curve is U-shaped because the firm initially is able to spread out fixed costs over additional units, but as quantity increases, it costs more to increase quantity further because some important input is limited. Marginal cost and average total cost have the relationship they do because marginal cost pulls average total cost in the same direction. The marginal cost and average total cost curves intersect at the minimum of average total cost; that quantity is the efficient scale
Which is not an essential characteristic of a perfectly competitive market?
Firms have limited market power.
If the demand increases in a perfectly competitive market, what will likely occur?
Firms will temporarily make a profit due to a higher price. Firms will enter the market in hopes of capturing some profits. The short-run supply curve will shift to the right, causing price to eventually fall. All are correct.
Average Fixed Cost
Fixed cost divided by the quantity of output (FC/Q)
Given the shutdown rule, what does the firm's short-run supply curve look like? It is the section of the:
MC curve that lies above the AVC curve.
Which of the following holds true at the chosen level of output in the long run for firms in a perfectly competitive market?
MR = MC
A firm realizes that the market price has fallen below its average total costs, and it is now earning a loss. What is the best action for the firm to take in the short run?
Produce where MC = MR to minimize losses if P > AVC.
Marginal Product
The increase in output that arises from an additional unit of input
Marginal Cost
The increase in total cost that arises from an extra unit of production
Total Cost
The market value of the inputs a firm uses in production
Economies of Scale
The property whereby long-run average total cost falls as the quantity of output increases EX: Often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task. For instance, if Ford hires a large number of workers and produces a large number of cars, it can reduce costs with modern assembly-line production.
Diseconomies of Scale
The property whereby long-run average total cost rises as the quantity of output increases EX: Diseconomies of scale can arise because of coordination problems that are inherent in any large organization. The more cars Ford produces, the more stretched the management team becomes, and the less effective the managers become at keeping costs down.
Constant Returns to Scale
The property whereby long-run average total cost stays the same as the quantity of output changes
Diminishing Marginal Product
The property whereby the marginal product of an input declines as the quantity of the input increases - As the number of workers increases, the marginal product declines, and the production function becomes flatter.
Efficient Scale
The quantity of output that minimizes average total cost
Production Function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
The marginal-cost curve crosses the average-total-cost curve at its minimum. Why?
This point of intersection is the minimum of average total cost.
Average Total Cost
Total cost divided by the quantity of output (TC/Q)
Profit
Total revenue minus total cost (P=TR-TC)
Economic Profit
Total revenue minus total cost, including both explicit and implicit costs (TR-TC(EC-IC)) - For a business to be profitable from an economist's standpoint, total revenue must cover all the opportunity costs, both explicit and implicit. - A firm making positive economic profit will stay in business. - When a firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production.
Accounting Profit
Total revenue minus total explicit cost (TR-EC) - Accounting profit is usually larger than economic profit.
Average Variable Cost
Variable cost divided by the quantity of output (VC/Q)
If there are implicit costs of production, a. accounting profit will exceed economic profit. b. economic profit will always be zero. c. economic profit will exceed accounting profit. d. accounting profit will always be zero. e. economic profit and accounting profit will be equal.
accounting profit will exceed economic profit.
Give an example of an opportunity cost that an accountant would not count as a cost. Why would the accountant ignore this cost?
an accountant would not count the owner's opportunity cost of alternative employment as an accounting cost. An example is given in the text in which Helen runs a cookie business, but she could instead work as a computer programmer. Because she's working in her cookie factory, she gives up the opportunity to earn $100 per hour as a computer programmer. The accountant ignores this opportunity cost because no money flow occurs. But the cost is relevant to Helen's decision to run the cookie factory
In a perfectly competitive market, producers:
are able to sell as much as they want without affecting the market price.
In the short run, the fixed costs of a firm:
are irrelevant in deciding whether to shut down production.
Whenever marginal cost is less than average total cost,
average total cost is falling. EX: Average total cost is like your cumulative grade point average. Marginal cost is like the grade in the next course you will take. If your grade in your next course is less than your grade point average, your grade point average will fall.
Whenever marginal cost is greater than average total cost,
average total cost is rising. EX: Average total cost is like your cumulative grade point average. Marginal cost is like the grade in the next course you will take. If your grade in your next course is higher than your grade point average, your grade point average will rise.
The efficient scale of production is the quantity of output that minimizes a. average fixed cost. b. average total cost. c. average variable cost. d. marginal cost.
average total cost.
When marginal costs are below average total costs, a. average fixed costs are rising. b. average total costs are falling. c. average total costs are rising. d. average total costs are minimized.
average total costs are falling.
In the short run, the relevant costs for a firm to consider whether to shut down production are:
average variable costs.
If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will a. be flat (horizontal). b. slope upward. c. slope downward. d. be U-shaped.
be U-shaped.
If a production function exhibits diminishing marginal product, its slope a. is linear (a straight line). b. becomes steeper as the quantity of the input increases. c. could be any of these answers. d. becomes flatter as the quantity of the input increases.
becomes flatter as the quantity of the input increases.
If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve a. is linear (a straight line). b. could be any of these answers. c. becomes steeper as the quantity of output increases. d. becomes flatter as the quantity of output increases.
becomes steeper as the quantity of output increases.
When firms have market power, it means that they:
can noticeably affect the market price.
If firms are producing at a profit-maximizing level of output where the price is equal to the average total cost:
economic profits must be zero.
Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
economies of scale exist when long-run average total cost falls as the quantity of output increases, which occurs because of specialization among workers. Diseconomies of scale exist when long-run average total cost rises as the quantity of output increases, which occurs because of coordination problems inherent in a large organization
In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience a. an increase in average total costs. b. diseconomies of scale. c. economies of scale. d. constant returns to scale.
economies of scale.
If the demand increases in a perfectly competitive market, firms will likely:
enter the market in hopes of capturing some profits.
In a perfectly competitive market, when the price is greater than the minimum average total cost for most firms, some will:
enter until the price drops to equal minimum ATC.
Accounting profit is equal to total revenue minus a. implicit costs. b. variable costs. c. the sum of implicit and explicit costs. d. explicit costs. e. marginal costs.
explicit costs.
Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn
figure 4 shows a production function that exhibits diminishing marginal product of labor. figure 5 shows the associated total-cost curve. The production function is concave because of diminishing marginal product, while the total-cost curve is convex for the same reason
Many decisions are
fixed in the short run but variable in the long run
A competitive market is one in which:
fully informed price-taking buyers and sellers easily trade a standardized good.
An essential characteristic of a perfectly competitive market is:
goods are standardized.
How and why does a firm's average-total-cost curve differ in the short run compared with the long run?
in the long run, a firm can adjust the factors of production that are fixed in the short run; for example, it can increase the size of its factory. As a result, the long-run average-total-cost curve has a much flatter U-shape than the short-run average-total-cost curve. In addition, the long-run curve lies along the lower envelope of the short-run curves
When some firms leave a perfectly competitive market, the price:
increases, and profits of those left rise.
The number of firms in a perfectly competitive market:
is fixed in the short run.
For a firm in a perfectly competitive market, if it is producing at a level of output where marginal costs are equal to marginal revenue, it:
is producing a profit-maximizing quantity.
If a firm is earning a positive economic profit, it means that it:
is using its resources in the most profitable way.
In a perfectly competitive market price takers exist because there are:
many buyers and sellers.
What is marginal product, and what does it mean if it is diminishing?
marginal product is the increase in output that arises from an additional unit of input. Diminishing marginal product means that the marginal product of an input declines as the quantity of the input increases
If a firm is earning a negative economic profit, it means that:
more profits could be earned with the same resources in another industry.
If firms are producing at a profit-maximizing level of output where the price exceeds the average total cost:
other firms will enter the market.
When demand increases in a perfectly competitive market, in the short run __________________, and in the long run __________________.
prices increase; supply increases
For a firm in a perfectly competitive market, if it produces where marginal cost exceeds marginal revenue it:
should cut back production to increase profits.
If the demand in a perfectly competitive market decreases, the price will:
temporarily decrease.
In the long run, firms in a perfectly competitive market choose to produce a quantity:
that earns zero economic profits.
A firm in a perfectly competitive market can maximize its profits by producing:
the level of output where marginal cost equals marginal revenue.
In a perfectly competitive market, when the price is below the minimum average total cost for all firms:
the price will eventually rise once enough firms have left the market.
What is the relationship between a firm's total revenue, profit, and total cost?
the relationship between a firm's total revenue, profit, and total cost is profit equals total revenue minus total costs
For firms that sell one product in a perfectly competitive market, marginal revenue is always:
the same as market price.
Economic profit is equal to total revenue minus a. variable costs. b. implicit costs. c. explicit costs. d. marginal costs.
the sum of implicit and explicit costs.
Define total cost, average total cost, and marginal cost. How are they related?
total cost consists of the costs of all inputs needed to produce a given quantity of output. It includes fixed costs and variable costs. Average total cost is the cost of a typical unit of output and is equal to total cost divided by the quantity produced. Marginal cost is the cost of producing an additional unit of output and is equal to the change in total cost divided by the change in quantity. An additional relation between average total cost and marginal cost is that whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising