Econ 101 Exam 3 7-10

In the scenario presented in the previous question, what is Gita's yearly variable cost in dollars?

$40,000; Variable costs vary directly with the number of units of the good that are being produced. In Gita's case, she must pay the cost of the mechanic ($20,000) and the cost of materials ($20,000). This totals $40,000.

Marginal revenue is defined as the

change in total revenue divided by the change in the quantity of output

According to class lectures, the price a firm will charge for its product is determined by finding the height of the firm's ___________ at the profit-maximizing level of output q*.

demand curve

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?

40,000 candy canes; 200 candy canes * 200 elves = 40,000 candy canes

Fill in the missing value for C from the table below... average product

70; AP = output /L = 280/4 = 70.

Suppose you are earning $50,000 accounting profit in your current laundromat business. If your other options were to earn $50,000 accounting profit running a yogurt shop, or $45,000 being a florist, or $60,000 running a beauty shop, what is your economic profit?

A loss of $10,000; Remember that implicit cost is the same as opportunity cost, and opportunity cost is the value of the next best alternative. As the text points out, normal profit is a good proxy for opportunity cost. In this case, the next best alternative is running a beauty shop, the value of which is $60,000. Subtracting the opportunity (or implicit) cost from the accounting profit of $50,000, we get an economic loss of $10,000.

Which of the following is not true regarding a firm in perfect competition?

A single firm can influence the demand for its product by advertising.; Advertising would simply increase the cost of the firm, but not change the price. With identical products, the firm acts as a price-taker and cannot control the price it charges for its output.

The profit maximizing level of output for the firm is where

marginal revenue equals marginal cost for the last unit produced.

The economic cost of growing corn on a farm is typically

much greater than the accounting cost due to the existence of large opportunity costs

Assume a competitive industry is in long-run equilibrium. The short-run effects (on the typical firm) of a decrease in demand are which of the following?

prices decrease; firm output decreases

In the scenario presented previously, what is Gita's yearly economic profit?

$101,000; Economic profit takes into account both explicit and implicit (opportunity) cost. In Gita's case, her revenue ($250,000) minus her explicit cost ($100,000) and implicit cost ($49,000) totals $101,000 in yearly economic profit.

In the scenario presented previously, what is Gita's accounting profit?

$150,000; Accounting profit only takes explicit cost into account. In Gita's case, her revenue ($250,000) minus her explicit cost ($100,000) totals $150,000 in accounting profit.

For a firm in a perfectly competitive industry, the demand curve for its own product is _________.

The same as the market price; The demand for a firm's own product is a perfectly elastic demand function equal to the price of the good. It must sell its output at the going market price.

A competitive firm's short run supply curve is most closely related to which of the following curves?

marginal cost

If a firm shuts down in the short run,

losses would equal its fixed costs.

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.

Increase; If MC>AC AC will rise.

Marginal product is the change in a firm's output divided by the change in the amount of an input (like capital or labor) used.

True

In a perfectly competitive market, there are

many buyers and sellers, and no single participant can significantly affect the price of product.

Patents stimulate innovation by

providing incentives to incur research and development costs

Most markets are not monopolies in the real world because

there are substitutes for most goods.

In the long run, a perfectly competitive firm maximizing profit will produce where:

average cost is at a minimum.

The law of diminishing marginal returns means that when one uses more and more of an input:

Output will eventually increase at a decreasing rate.

Fill in the missing value for B from the table below... Output

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

In the table below, what is the marginal product of the third worker?

55 units; The change in output caused by adding the third worker is (190-135) = 55 units.

Fill in the missing value for A from the table below... Marginal Product

80; Change in output = 180-100 = 80. Change in labor =1. 80/1 = 80.

With increasing marginal cost, if marginal cost is equal to average cost, average cost at this point must be ______________.

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.

Which of the following is NOT true regarding perfectly competitive markets?

It is difficult or impossible for a firm to enter and compete in the market; Perfect competition assumes free entry, meaning anyone can come in and compete without serious impediments or barriers.

Will a change in fixed costs change marginal cost?

No; A change in fixed costs will only change total costs and average costs. Marginal cost is affected only by changes in variable costs.

Variable cost ______________ while fixed cost ______________ as output ______________ in the short run.

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.

n the scenario presented previously, what is Gita's yearly explicit cost?

$100,000; Explicit costs are actual, out-of-pocket costs. In Gita's case, her explicit cost is her fixed cost ($60,000) and variable cost ($40,000), totaling $100,000.

In the scenario presented previously, what is Gita's yearly implicit cost?

$49,000; Implicit cost is opportunity cost. In Gita's case, her foregone interest ($4,000), foregone salary ($40,000), and foregone income ($5,000) total $49,000.

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 ________.

$5.00; Total cost goes up by $250 (1 worker * wage) and total output goes up by 50. Marginal cost = $250/50 = $5.00.

Using the table below, calculate the marginal cost of the 4, 6, and 8 units of output.

A=90, B=110, C=125; MC = change in total cost / change in output. For example for A change in total cost = (1380-1200=180), change in output = (4-2=2) MC=180/2=90.

A fall in demand in a perfectly competitive market that is in a long-run equilibrium will do which of the following?

Cause firms to cut back production in the short run and some to leave the industry in the long run.

The law of diminishing marginal returns is the cause of ______________ marginal product and ______________ marginal cost.

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.

When a firm earns zero economic profits, it does which of the following?

Has a positive accounting profit; Economic profit includes opportunity costs. If we have zero economic profits, it means we are doing the same as our opportunity cost, and both possible firms are getting the normal rate of return. Our accounting profit is therefore positive if we examine this rate of return. Alternatively, we could just look at profits without subtracting opportunity costs to get accounting profits, and they'll be positive since they are zeroed out when including opportunity costs.

Which of the following is a cause of diminishing marginal productivity?

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.

A perfectly competitive firm that chooses to produce will maximize profits at the output level where which of the following is true?

Marginal cost is equal to marginal revenue; This is the output decision rule for a firm that maximizes profit. Keep expanding production if MC < MR, and then stop at the output level where MC = MR. Doing so will maximize your profit. If you keep producing past this point, you'll start lowering profit since you'll be producing at a point where the MC is greater than the price. Remember that we assume a constant price but upward-sloping MC function. Also remember that in perfect competition, P = MR for a single firm.

Will a change in fixed costs change total variable cost?

No; Changes in fixed costs do not change total variable costs. A change in the cost of variable inputs will change total variable costs.

Given all the characteristics of perfect competition, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from?

Price; We assume the final product is identical, so the other factors don't matter. We only examine the price, and it must also equalize across firms in perfect competition.

Regarding perfect competition, what does it mean when the goods sold by the firms in a market are homogeneous?

The good sold by one firm is a perfect substitute of the good sold by another firm in the same market; Homogenous means identical. An example is wheat. After it's cut and dried, it's all the same wheat, so one farmer can't command a different price for his wheat.

For a firm in a perfectly competitive market, average revenue equals ________.

The market price; TR = P*Q. Dividing both sides by Q, we get AR (average revenue) is equal to price. In other words, at any level of output, the average revenue per unit is just equal to the market price. This makes sense, since all units were sold at the market price to begin with.

Do the following graphs depict the short run or the long run?

The short run; The short run as the graph indicates there are fixed and variable costs in this time period.

Marginal cost is the slope of _______.

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.

In the theory of firm behavior, we assume that firms attempt to maximize _________.

Total economic profits; Remember that profit means firms consider revenues and costs. High revenues won't do much good for a firm if the costs are even higher.

Will a change in fixed costs change total cost?

Yes; Fixed cost is part of total cost; thus, the latter will change when fixed cost changes.

A car wash owner is currently operating at a profit while providing 120 car washes per week. At this output level, marginal cost exceeds marginal revenue (MC > MR). To maximize profit, the owner should

decrease output.

Gita is an auto mechanic and runs a small repair shop. She hires one mechanic at $20,000 per year, pays a monthly rent of $5,000 towards the lease of the premises where her repair shop is located, and spends $20,000 per year on materials needed for repairing cars and trucks. She has invested $40,000 of her own savings in heavy equipment (air and strut compressors, brake lathes, heavy-duty lifts etc.) that could earn her $4,000 per year if invested elsewhere. She has been offered $40,000 per year by a competitor to work as a mechanic for them and she estimates the value of income she could earn in her spare time to be $5,000. The repair shop's total annual revenue is $250,000. What is Gita's yearly fixed cost in dollars?

$60,000; remember a fixed cost is a cost that is not directly related to the number of units of the good being produced. In this case, Gita must pay the rent for her repair shop, which at $5,000 a month equals $60,000 per year.

In a perfectly competitive market, a single firm that sets its price a small amount above the market price will do which of the following?

Not sell any units at all; With products being perfect substitutes (homogenous goods), the price must be the same since the goods are the same. If one person tries to sell at a higher price, he'll sell zero since buyers can buy the same identical good at a lower price from another seller.

In the scenario presented previously, is Gita making the best use of her resources (time and money) in terms of economic profit?

Yes; Yes, since economic profit is positive. There is nothing else that would be a better use of her time and money.

A firm's implicit costs are

opportunity costs of production that do not involve money outlays.