CFA 15: Demand & Supply Analysis: The Firm

A firm experiencing an increase in the marginal product of labor employed would most likely: allow an increased number of workers to specialize and become more adept at their individual functions. find that an increase in workers cannot be efficiently matched by other inputs that are fixed such as property, plant, and equipment. find that the supply of skilled workers is limited, and additional workers lack essential skills and aptitudes possessed by the current workforce.

A is correct. Adding new workers in numbers sufficient for them to specialize in their roles and functions should increase marginal product of labor.

An agricultural firm operating in a perfectly competitive market supplies wheat to manufacturers of consumer food products and animal feeds. If the firm were able to expand its production and unit sales by 10% the most likely result would be: a 10% increase in total revenue. a 10% increase in average revenue. an increase in total revenue of less than 10%.

A is correct. In a perfectly competitive market, an increase in supply by a single firm will not affect price. Therefore, an increase in units sold by the firm will be matched proportionately by an increase in revenue.

The marketing director for a Swiss specialty equipment manufacturer estimates the firm can sell 200 units and earn total revenue of CHF500,000. However, if 250 units are sold, revenue will total CHF600,000. The marginal revenue per unit associated with marketing 250 units instead of 200 units is closest to: CHF 2,000. CHF 2,400. CHF 2,500.

A is correct. Marginal revenue per unit is defined as the change in total revenue divided by the change in quantity sold. MR = ΔTR ÷ ΔQ. In this case, change in total revenue equals CHF100,000, and change in total units sold equals 50. CHF100,000 ÷ 50 = CHF2,000.

An operator of a ski resort is considering offering price reductions on weekday ski passes. At the normal price of €50 per day, 300 customers are expected to buy passes each weekday. At a discounted price of €40 per day 450 customers are expected to buy passes each weekday. The marginal revenue per customer earned from offering the discounted price is closest to: €20. €40. €50.

A is correct. Marginal revenue per unit is defined as the change in total revenues divided by the change in quantity sold. MR = ΔTR ÷ ΔQ. In this case, change in total revenue per day equals €3,000 [(450 x €40) - (300 x €50)], and change in units sold equals 150 (450 - 300). €3,000 ÷ 150 = €20.

Normal profit is best described as: zero economic profit. total revenue minus all explicit costs. the sum of accounting profit plus economic profit.

A is correct. Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero.

A profit maximum is least likely to occur when: average total cost is minimized. marginal revenue equals marginal cost. the difference between total revenue and total cost is maximized.

A is correct. The quantity at which average total cost is minimized does not necessarily correspond to a profit maximum.

The manager of a small manufacturing firm gathers the following information about the firm's labor utilization and production: Exhibit 2 Labor (L) Total Product (TP) 0 0 1 150 2 320 3 510 4 660 5 800 Refer to the data in Exhibit 2. The number of workers resulting in the highest level of average product of labor is closest to: 3. 4. 5.

A is correct. Three workers produce the highest average product equal to 170. AP = 510/3 = 170.

The marginal revenue per unit sold for a firm doing business under conditions of perfect competition will most likely be: equal to average revenue. less than average revenue. greater than average revenue.

A is correct. Under perfect competition, a firm is a price taker at any quantity supplied to the market, and AR = MR = Price.

A firm will expand production by 200 units and must hire at least one additional worker. The marginal product per day for one additional unskilled worker is 100 units. The marginal product per day for one additional skilled worker is 200 units. Wages per day are $200 for an unskilled worker and $450 for a skilled worker. The firm will most likely minimize costs at the higher level of production by hiring: one additional skilled worker. two additional unskilled workers. either a skilled worker or two unskilled workers.

B is correct. An expansion in production by 200 units can be achieved by two unskilled workers at a total cost of $400, or $2 per unit produced. $400/200 = $2 per unit produced.

A firm that increases its quantity produced without any change in per-unit cost is experiencing: economies of scale. diseconomies of scale. constant returns to scale.

C is correct. Output increases in the same proportion as input increases occur at constant returns to scale.

A firm produces handcrafted wooden chairs, employing both skilled craftsmen and automated equipment in its plant. The selling price of a chair is €100. A craftsman earns €900 per week and can produce ten chairs per week. Automated equipment leased for €800 per week can produce ten chairs per week. The marginal revenue product (per week) of hiring an additional craftsman is closest to: €100. €900. €1,000.

C is correct. The marginal revenue product is the marginal product of an additional craftsman (10 chairs) times the price per chair (€100). 10 × €100 = €1,000.

A firm's director of operations gathers the following information about the firm's cost structure at different levels of output: Exhibit 1 Quantity (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) 0 200 0 1 200 100 2 200 150 3 200 200 4 200 240 5 200 320 Refer to the data in Exhibit 1. When quantity produced is equal to 4 units, the average fixed cost (AFC) is closest to: 50. 60. 110.

A is correct. Average fixed cost is equal to total fixed cost divided by quantity produced: AFC = TFC/Q = 200/4 = 50.

A firm develops and markets consumer electronic devices in a perfectly competitive, decreasing-cost industry. The firm's products have grown in popularity. The most likely equilibrium response in the long run to rising demand for such devices is for selling prices to: fall and per-unit production costs to decrease. rise and per-unit production costs to decrease. remain constant and per-unit production costs to remain constant.

A is correct. A positive shift in demand will cause firms to increase supply, but at decreasing costs. The decreasing cost per unit will be passed on to consumers and cause prices to fall in the long run.

The short-term breakeven point of production for a firm operating under perfect competition will most likely occur when: price is equal to average total cost. marginal revenue is equal to marginal cost. marginal revenue is equal to average variable costs.

A is correct. Under perfect competition, price equals marginal revenue. A firm breaks even when marginal revenue equals average total cost.

A firm supplying a commodity product in the marketplace is most likely to receive economic rent if: demand increases for the commodity and supply is elastic. demand increases for the commodity and supply is inelastic. supply increases for the commodity and demand is inelastic.

B is correct. Economic rent results when a commodity is fixed in supply (highly inelastic) and the market price is higher than what is required to bring the commodity to market. An increase in demand in this circumstance would result in a rising price and increased potential for economic rent.

A firm's director of operations gathers the following information about the firm's cost structure at different levels of output: Exhibit 1 Quantity (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) 0 200 0 1 200 100 2 200 150 3 200 200 4 200 240 5 200 320 Refer to the data in Exhibit 1. The level of unit production resulting in the lowest average total cost (ATC) is closest to: 3. 4. 5.

C is correct. Average total cost is equal to total cost divided by quantity produced. At 5 units produced the average total cost is 104. ATC = TC/Q = 520/5 = 104.

A firm's director of operations gathers the following information about the firm's cost structure at different levels of output: Exhibit 1 Quantity (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) 0 200 0 1 200 100 2 200 150 3 200 200 4 200 240 5 200 320 Refer to the data in Exhibit 1. When the firm increases production from 4 to 5 units, the marginal cost (MC) is closest to: 40. 64. 80.

C is correct. Marginal cost is equal to the change in total cost divided by the change in quantity produced. MC = ΔTC/ΔQ = 80/1 = 80.

The short-term shutdown point of production for a firm operating under perfect competition will most likely occur when: price is equal to average total cost. marginal revenue is equal to marginal cost. marginal revenue is less than average variable costs.

C is correct. The firm should shut down production when marginal revenue is less than average variable cost.

Under conditions of perfect competition, in the long run firms will most likely earn: normal profits. positive economic profits. negative economic profits.

A is correct. Competition should drive prices down to long-run marginal cost, resulting in only normal profits being earned.

Entrepreneurs are most likely to receive payment or compensation in the form of: rent. profit. wages.

B is correct. Profit is the return to entrepreneurship for its contribution to the economic process.

The manager of a small manufacturing firm gathers the following information about the firm's labor utilization and production: Exhibit 2 Labor (L) Total Product (TP) 0 0 1 150 2 320 3 510 4 660 5 800 Refer to the data in Exhibit 2. The marginal product of labor demonstrates increasing returns for the firm if the number of workers is closest to but not more than: 2. 3. 4.

B is correct. Marginal product is equal to the change in total product divided by the change in labor. The increase in MP from 2 to 3 workers is 190: MP = ΔTP/ΔL = (510 - 320)/(3 - 2) = 190/1 = 190.

A firm engages in the development and extraction of oil and gas, the supply of which is price inelastic. The most likely equilibrium response in the long run to an increase in the demand for petroleum is that oil prices: increase, and extraction costs per barrel fall. increase, and extraction costs per barrel rise. remain constant, and extraction costs per barrel remain constant.

B is correct. The development and extraction of scarce oil and gas is an increasing-cost industry. A positive shift in demand will cause firms to increase supply, but at higher costs. The higher costs associated with increasing supply will cause prices to rise.

For a manufacturing company to achieve the most efficient combination of labor and capital, and therefore minimize total costs for a desired level of output, it will most likely attempt to equalize the: average product of labor to the average product of capital. marginal product per unit of labor to the marginal product per unit of capital. marginal product obtained per dollar spent on labor to the marginal product per dollar spent on capital.

C is correct. Costs are minimized when substitution of labor for capital (or the reverse) does not result in any cost savings, which is the case when the marginal product per dollar spent is equalized across inputs.

A firm is operating beyond minimum efficient scale in a perfectly competitive industry. To maintain long-term viability the most likely course of action for the firm is to: operate at the current level of production. increase its level of production to gain economies of scale. decrease its level of production to the minimum point on the long-run average total cost curve.

C is correct. The firm operating at greater than long-run efficient scale is subject to diseconomies of scale. It should plan to decrease its level of production.

A Mexican firm employs unskilled, semi-skilled, and skilled labor in a cost-minimizing mix at its manufacturing plant. The marginal product of unskilled labor is considerably lower than semi-skilled and skilled labor, but the equilibrium wage for unskilled labor is only 300 pesos per day. The government passes a law that mandates a minimum wage of 400 pesos per day. Equilibrium wages for semi-skilled and skilled labor exceed this minimum wage and therefore are not affected by the new law. The firm will most likely respond to the imposition of the minimum wage law by: employing more unskilled workers at its plant. employing fewer unskilled workers at its plant. keeping the mix of unskilled, semi-skilled, and skilled workers the same.

B is correct. The firm employs labor of various types in a cost-minimizing combination. Profit is maximized when marginal revenue product is equalized across each type of labor input. If the wage rate of unskilled workers increases, the marginal product produced per dollar spent to employ unskilled labor will decline. The original employment mix is no longer optimal, so the firm will respond by shifting away from unskilled workers to workers whose wages are unaffected by the minimum wage law.

A firm produces handcrafted wooden chairs, employing both skilled craftsmen and automated equipment in its plant. The selling price of a chair is €100. A craftsman earns €900 per week and can produce ten chairs per week. Automated equipment leased for €800 per week can produce ten chairs per week. The firm would like to increase weekly output by 50 chairs. The firm would most likely enhance profits by: hiring additional craftsmen. leasing additional automated equipment. leasing additional automated equipment and hiring additional craftsmen in equal proportion.

B is correct. The marginal revenue product for additional power tools is €1,000, which exceeds the €800 cost of the tools by €200. (10 × €100 = €1,000) - €800 = €200.

When total revenue is greater than total variable costs but less than total costs, in the short term a firm will most likely: exit the market. stay in the market. shut down production.

B is correct. When total revenue is enough to cover variable costs but not total fixed costs in full, the firm can survive in the short run but would be unable to maintain financial solvency in the long run.