Econ 528 Final Exam Study Guide

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. Refer to Figure 4-3. What is the value of the dead weight loss at a price of $18? A) $100 B) $180 C) $660 D) $1040

A) $100 At price 18, deadweight loss = Area of the Triangle with base (18-13) and height (80-40) = (1/2) x 5 x 40 = 100

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. Refer to Figure 4-3. What is the value of producer surplus at the equilibrium price of $15? Select one: a. $160 b. $240 c. $80 d. $400

A) $160

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. Refer to Figure 4-3. What is the value of producer consumer surplus at a price of $18? A) $240 B) $300 C) $340 D) $720

A) $240 At price 18, producer surplus = Area of the trapezoid above the supply curve and below the price line 18 = Area of the Rectangle with sides (18-13) and 40 + area of the triangle with base 40 and height (13-11) = (5x40) + {(1/2) x40x2} = 200 + 40 = 240

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. Refer to Figure 4-3. What is the value of consumer surplus at a price of $18? A) $60 B) $120 C) $180 D) $240

A) $60 At price 18, consumer surplus = Area of the triangle below the demand curve and above the price line 18 = Area of the triangle with base 40 and height (21-18) = (1/2)*40*(21-18) = (1/2) x 40 x 3 = 60

Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. Refer to Figure 12-4. If the market price is $30, the firm's profit-maximizing output level is Select one: a. 180. b. 240. c. 130. d. 0.

A) 180

The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." Based on this quote, what must be true of the plant's average cost of production curve? A) It is upward-sloping. B) It is downward-sloping. C) It is a ray from the origin. D) It is U-shaped

A) It is upward-sloping

The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." This quote suggests that Select one: a. as Toyota expanded its capacity, it experienced diseconomies of scale. b. Toyota was focused on "churning" out cars for which it did not invest sufficiently in training its workers. c. high demand for Toyota's cars prevented the company from focusing on its strength: auto design. d. Toyota was experiencing an excess demand for its automobiles which it had difficulty keeping up with

A) as Toyota expanded its capacity it experienced diseconomies of scale

The price of a factor of production that is in fixed supply is called A) economic rent. B) economic profit. C) a compensating differential. D) opportunity cost.

A) economic rent

Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend? Select one: a. economies of scale in farming b. diminishing returns to labor in farming c. diseconomies of scale in farming

A) economies of scale in farming

If the marginal product of capital is six times as large as the marginal product of labor and the price of capital is three times as large as the price of labor, for costs to be minimized: Select one: a. more capital should be used and less labor. b. more labor should be used and less capital. c. more labor should be used but the use of capital should remain constant. d. the price of capital must fall.

A) more capital should be used and less labor

A firm's demand curve for labor slopes downwards because Select one: a. of the law of diminishing marginal returns. b. of rising marginal product. c. firms supply less labor as the wage rate rises. d. workers supply less labor services as the wage rate falls.

A) of the law of diminishing marginal returns

Economies of scope refers to the decrease in average total cost that can occur when a firm A) produces more than one product B) has monopoly power in world markets C) controls the raw materials used as inputs D) narrows the scope of its regional markets

A) produces more than one product

The long-run average cost curve shows A) the lowest average cost of producing every level of output in the long run. B) where the most profitable level of output occurs. C) the average cost of producing where diminishing returns are not present. D) the plant size or scale that the firm should build.

A) the lowest average cost of producing every level of output in the long run

Would you expect economies of scope to occur in the following situation; Producing two goods that use the same resource Select one: a. Yes b. I do not know. c. No d. I cannot answer based on the available information

A) yes

Identify the curves in the diagram. A ________ B ________ C ________

A=marginal cost curve B=average total cost curve C=average variable cost curve

As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost?

As the level of output increases, the value of average fixed cost decreases. The same fixed cost is divided by a larger and larger output. The difference between average total cost and average variable cost is average fixed cost, so as is stated above, the value decreases.

Which of the following is a reason why a firm would experience diseconomies of scale? Select one: a. To finance an increase in the size of its plant a firm must borrow more money or sell more shares of stock. b. As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants. c. As the size of the firm increases, it must operate in other countries where differences in language, customs and laws increase its average costs. d. As the size of the firm increases, it becomes more difficult to find markets where it doesn't already have operations.

B) As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.

Refer to Figure 12-3. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. Identify the area that represents the loss. A) P2 deP1 B) P3cbP1 C) P3caP0 D) 0P1 bQ1

B) P3cbP1

At the minimum efficient scale A) all possible economies of scale have not been exhausted. B) the firm has achieved the lowest possible average cost of production. C) any increases in the scale of operation will encounter further economies of scale. D) marginal cost is at its minimum.

B) The firm has achieved the lowest possible average cost of production.

Which of the following is the best example of a short run adjustment? A) A local bakery purchases another commercial oven as part of its capacity expansion. B) Your local Wal-Mart hires two more associates. C) Smith University completed negotiations to acquire a large piece of land to build its new library. D) Toyota builds a new assembly plant in Texas.

B) Your local Wal-Mart hires two more associates.

Learning curves represent the relationship between Select one: a. average variable cost and the number of units produced per time period b. average variable cost and the cumulative number of units produced c. total cost and technology d. average variable cost and the rate of increase in technology

B) average variable cost and the cumulative number of units produced

Economies of scope exist between book publishing and magazine publishing if Select one: a. the cost of publishing a book falls over time as the publisher acquires more experience. b. the cost of publishing a magazine is lower for book publishers than for other firms. c. the cost of a publishing a book is not subject to diminishing marginal returns. d. the cost of publishing a magazine is lower for firms that publish many magazines than for firms that publish only one magazine.

B) the cost of publishing a magazine is lower for book publishers than for other firms

The term "derived demand" refers to A) the demand for financial products called derivatives. B) the demand for a factor of production that is derived from the demand for the good the factor produces. C) a firm's estimated demand curve derived from sales data. D) a demand curve that derives from the availability of resources

B) the demand for a factor of production that is derived from the demand for the good the factor produces

Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. Refer to Figure 12-9. Identify the firm's short-run supply curve. Select one: a. the marginal cost curve from d and above b. the marginal cost curve from b and above c. the marginal cost curve d. the marginal cost curve from a and above

B) the marginal cost curve from b and above

Explain the similarity between how mass production and economies of scope effect the cost of production.

Both of these methods suggest ways of minimizing cost for the firm. Both of these methods suggest that firms can minimize costs by producing more (either one or more of all).

Figure 17-1 shows the marginal revenue product for Dale's Hand-Sewn Doilies, a producer of linen doilies. Refer to Figure 17-1. If the wage rate is $40, how many workers should Dale hire? Select one: a. 4 units b. 6 units c. 3 units d. 5 units

C) 3 units

Would you expect economies of scope to occur in the following situation; Producing two goods that are complementary to each for the buyer such as coffee and sugar. Select one: a. Yes b. I do not know c. No d. Cannot be determined based on the provided information

C) No

Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run? A) The equilibrium price is likely to increase and profits are likely to remain unchanged. B) The equilibrium price is likely to remain unchanged and profits are likely to increase. C) The equilibrium price is likely to decrease and profits are likely to decrease. D) The equilibrium price is likely to increase and profits are likely to increase.

C) The equilibrium price is likely to decrease and profits are likely to decrease

Economies of scale exist as a firm increases its size in the long run because of all of the following except Select one: a. as a larger input buyer, the firm can purchase inputs at a lower per unit cost. b. labor and management can specialize even further in their tasks.  c. as a firm expands its production, its profit margin per-unit of output increases. d. the firm can afford more sophisticated technology in production.

C) as a firm expands its production, its profit margin per-unit of output increases

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves: A) quadratic returns to scale B) diseconomies of scope C) economies of scope D) diseconomies of scale and diseconomies of scope

C) economies of scope

The demand for labor is described as a derived demand because Select one: a. it is derived by workers seeking to earn income to fund the consumption of goods and services. b. it is derived from government institutions which rely on labor markets for the purpose of raising tax revenue. c. it is derived from the demand for products that use labor in the production process. d. it is derived by producers seeking to make profits by starting new businesses.

C) it is derived from the demand for products that use labor in the production process

The minimum efficient scale is Select one: a. the plant size that yields the most profit. b. the level of output where diminishing returns have not set in yet. c. level of operation where long-run average costs are lowest. d. the smallest output level where the firm finally reaches productive efficiency.

C) level of operation where long-run average costs are lowest

Which type of workers is most likely to enjoy substantial economic rent? Select one: a. Those with low wages which result from no need to have a period of training. b. Those with high wages which compensate them for unpleasant aspects of their jobs. c. Those with high wages which result from them possessing the innate ability to develop some skill to a very high level d. Those with low wages which can be paid because their jobs have other very pleasant aspects.

C) those with high wages which result from them possessing the innate ability to develop some skill to a very high level

All of the following statements are true of the minimum efficient scale except one. Which one? A) All possible economies of scale have been exhausted. B) The short-run average total cost curve's minimum point is equal to the long run average cost curve's minimum point. C) Any increase in the scale of operation will encounter diseconomies of scale. D) An increase in the output level will increase profit.

D) An increase in the output level will increase profit

Which of the following is not a reason why firms experience economies of scale? Select one: a. Larger firms may be able to purchase inputs at lower costs than smaller competitors. b. Workers and managers can become more specialized, enabling them to be more productive. c. Technology can make it possible to increase production with a smaller increase in at least one input. d. As output increases, the managers can begin to have difficulty coordinating the operations of their firms.

D) As output increases, the mangers can begin to have difficulty coordinating the operations of their firms

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental price of capital is $6, and the price of output is $1.50, then the firm should Select one: a. Increase output by hiring more labor, more capital, or both b. Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both c. Hold output constant, but hire more labor and less capital d. None of the above is correct

D) None of the above is correct

Which of the following is an example of a long run adjustment? A) Your university offers Saturday morning classes next fall. B) Ford Motor Company lays off 2,000 assembly line workers. C) A soybean farmer turns on the irrigation system after a month long dry spell. D) Wal-Mart builds another Supercenter.

D) Wal-mart builds another supercenter

The marginal revenue product of labor for a firm Select one: a. will increase if the price of the firm's output increases. b. is the firm's demand curve for labor. c. will decrease if the firm hires more labor. d. All of the above are correct.

D) all of the above are correct

The marginal revenue product of labor for a firm A) will increase if the price of the firm's output increases B) is the firm's demand curve for labor C) will decrease if the firm hires more labor D) all of the above are correct

D) all of the above are correct

Economic rent is defined as Select one: a. the revenue received by a factor of production with an upward sloping supply curve. b. what you pay to rent your apartment or house. c. the surplus received by employing a factor of production in its highest valued use. d. the price of a factor of production that is fixed in supply.

D) the price of a factor of production that is fixed in supply

A company achieves competitive advantage whenever A) it has a product offering that is differentiated from the product offerings of rivals. B) its customers exhibit a high degree of loyalty to the company's brand. C) it has more core competences than its rivals. D)it has a better credit rating than rivals. E)it has an edge over rivals in attracting customers and coping with competitive forces.

E) it has an edge over rivals in attracting customers and coping with competitive forces

Why do economies of scope arise?

Economies of scope may arise because production of two or more goods may share an input. For example, beef and hides share the input cattle, so there will be cost savings from producing the two goods together rather than separately. Heating oil and kerosene are byproducts of refining oil. A steel company can produce different types of steel in the same furnace, which will be cheaper than trying to produce each type of steel in its own separate facility.

9) Answer whether the following statements are true or false: Over time, more experienced workers will demand higher wage and therefore, will lead to an increased in the cost of production for the producers. When you produce more, average cost of production increases.

False

Answer whether the following statement is true or false: Economic rent for an input is higher if the input is abundant is supply

False

Answer whether the following statement is true or false: If the marginal revenue product of an input is less than the price of that input, the input is too expensive and the firm should stop using that input and try to find some alternate inputs.

False

Evaluate the Statement; Cost approach is the easier approach to achieve optimal production when the firm is at the start of their production plan Select one: True False

False

Evaluate the Statement; Resource approach is the easier approach to achieve optimal production after the firm has already established a production plan and requires only incremental changes in their plan to achieve the maximum possible profit Select one: True False

False

Explain the difference between how mass production and economies of scope effect the cost of production.

Mass production involves production in mass quantity. It could be done by adopting various technological innovation such as the assembly line, or simply by finding cheaper source of resource. Economies of scope occur when producing two or more products jointly by one firm is less than the cost of producing them separately (producing chocolate and peanut butter product together). Mass production focuses on one good. Economies of Scope focus on the mix of goods. Mass production tries to minimize cost by utilizing division of labor or specialization. Economies of Scope minimizes by exploiting the complementarity between the mix of goods.

What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?

Minimum efficient scale is the lowest level of output at which all economies of scale have been exhausted — that is, where the long-run average cost curve stops sloping downward. In the long run, firms that don't reach minimum efficient scale will have higher average costs than competitors that do reach minimum efficient scale, so they will probably be driven out of business. However, firms that justify selling at premium prices due to product differentiation can survive.

Use the following to answer question 2: Quantity of Good 1 Q1 Quantity of Good 2 Q2 Total Cost of Producing Q1 + Q2 70 0 $ 96,000 0 255 144,000 70 255 192,000 Consider the table. Does the firm have economies of scope? Explain.

This firm has economies of scope. It is cheaper for this firm to produce two goods jointly ($192,000) than each good separately ($240,000 = $96,000 + $144,000).

What is the difference between "diminishing marginal returns" and "diseconomies of scale"? Select one: a. Both concepts explain why marginal cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable. b. Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases. c. Diminishing marginal returns, which applies only in the long run when all factors are variable, explains why average variable cost increases, while diseconomies of scale, which applies in the short run when at least one factor is fixed, explains why average total cost increases. d. Both concepts explain why average total cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable.

b) Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.

If, when a firm doubles all its inputs, its average cost of production decreases, then production displays a.) diminishing returns b.) economies of scale c.) diseconomies of scale d.) declining fixed costs

b. ) economies of scale

A reason why a perfectly competitive firm's demand for labor curve slopes downward is that A) each additional unit of labor hired is less efficient than previously hired units. B) in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns. C) the extra cost of hiring additional units of labor increases as a firm hires more units of labor. D) the firm's demand curve for the product that uses labor is downward sloping.

in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns