ECON 300 Unit 2
Equation of expansion path
(rise/run) x L
In the long-run, two conditions must be met: (These conditions are expressed in the following equations)
- marginal revenue must equal marginal cost - firms must be earning zero economic profit These conditions are expressed in the following equations: p = x - Q (Equation 1: the inverse demand equation gives the price) Q = nq (Equation 2: Q is the industry output, n is the number of firms, and q is output per firm) p = MC (Equation 3: price is equal to marginal cost) pq - C = 0 (Equation 4: revenue minus cost equals zero profit)
Perfect competition market characteristics
- the market consists of many small buyers and sellers - all firms produce identical products - all market participants have full information about price and product characteristics - transaction costs are negligible - firms can freely enter and exit the market This makes them price takers & demand curve is horizontal
MRTS Equation
-MPL/MPK
Consumer surplus is the area:
under the demand curve and above the market price up to the quantity purchased (what a consumer is willing to pay - what the good actually costs) 0.5 * (x-p) * Q
K =
wb/ra
Equation for change in consumer surplus
ΔCS = QΔp + 0.5ΔQΔp or ΔCS = Rx(1 + 0.5ex) [x =Δp/p = percentage increase in the price; R = pQ = total revenue from the sale of good Q; e = elast. of demand]
Equation for the effect of a change in the number of firms on the residual elasticity of demand for a firm (δei/δn)
δei/δn = e - no
Does the production function q = 1000L - (50/K) exhibit increasing, decreasing, or constant returns to scale?
increasing
Economies of scope & equation (SC)
less expensive to produce goods jointly than separately SC = [C(q1,0) + C(0,q2) - C(q1,q1)] / C(q1,q2) (SC comes out positive for economies of slope)
A competitive firm's supply curve is equal to its _____ _____ curve about the minimum of its avg. variable cost
marginal cost
Production function
q = AL^a * K^b
L =
ra/wb
Many marginal cost curves are U-shaped. As a result, it is possible that the MC curve hits the demand or price line at two output levels. Which is the profit maximizing output? Why? A. Profit is maximized when MC intersects demand from below because at any quantity greater than this MC is greater than marginal revenue. B. When MC intersects demand at two points, profit must be computed at both points to determine which one maximizes profit. C. Profit is maximized when MC equals price; therefore, either quantity will maximize profit. D. Profit is maximized when MC intersects demand from above because at this point average cost is decreasing.
A. Profit is maximized when MC intersects demand from below because at any quantity greater than this MC is greater than marginal revenue.
Efficient production is: A. a necessary but not sufficient condition for profit maximization. B. a sufficient condition for profit maximization. C. a necessary and sufficient condition for profit maximization. D. None of the above.
A. a necessary but not sufficient condition for profit maximization.
What is the welfare effect of a lump-sum tax, $L, assessed on each competitive firm in the market? Assume the market is in long-run equilibrium before the lump-sum tax. The lump-sum tax will A. decrease surplus by increasing the market price. B. not affect surplus by leaving the market price unchanged. C. increase surplus by decreasing the market quantity. D. decrease surplus by increasing the number of firms. E. increase surplus by increasing government revenue.
A. decrease surplus by increasing the market price.
If society cared only about the well-being of consumers so that it wanted to maximize consumer surplus, would a competitive market achieve that goal given that the government cannot force or bribe firms to produce more than the competitive level of output? Given the constraint that the government cannot force firms to produce more than the competitive level of output, the competitive market A. maximizes consumer surplus because firms produce where price equals marginal cost. B. maximizes consumer surplus because consumers obtain all the welfare. C. does not maximize consumer surplus because consumers value extra output by more than its marginal cost. D. does not maximize consumer surplus because firms maximize profits. E. does not maximize consumer surplus because deadweight loss is created.
A. maximizes consumer surplus because firms produce where price equals marginal cost.
Should a firm shut down if its revenue is R=$800 per week, its variable cost is VC=$700, and its sunk fixed cost is F=$2,400? This firm should A. not shut down because variable cost is less than revenue. B. not shut down because revenue is positive. C. not shut down because total cost is greater than variable cost. D. shut down because total cost is greater than revenue. E. shut down because fixed cost is greater than revenue.
A. not shut down because variable cost is less than revenue. In the short run, fixed costs are not accounted for
Suppose the production function for a certain device is q = L + K. If a laborminus−saving technical change has occurred, which of the following could be the new production function? A. q = L + 5K B. q = 5L + K C. q = 5 * (L + K) D. All of the above are possible.
A. q = L + 5K
The Internet is affecting holiday shipping. In years past, the busiest shipping period was Thanksgiving week. Now as people have become comfortable with e-commerce, they purchase later in the year and are more likely to have gifts shipped (rather than purchasing locally). FedEx, along with Amazon and other e-commerce firms, hires extra workers during this period, and many regular workers log substantial overtime hours. a. Assuming prior to this period the industry was in long-run equilibrium, are a firm's marginal and average costs likely to rise or fall with this extra business? A. Yes, increased demand will increase the market price; thus, each firm will operate at a point above and to the right of minimum average cost in the short run. B. No, the increase in demand will increase the number of firms such that the market price, marginal cost, and average cost will be unchanged in the short run. C. Increased demand will increase the market price; thus, each firm will operate at a higher marginal cost, but average cost will still be at its minimum point. D. No, a competitive firm produces at the point where minimum average cost equals marginal cost regardless of changes in demand. b. What are the effects on the number of firms, equilibrium price and output, and profits of such a seasonal shift in demand for e-retailers in both the short run and the long run. Explain your reasoning. A. In the short-run, the equilibrium price and the quantity each firm produces will increase and firms will earn positive economic profits, and in the long-run, the number of firms will be unchanged and firms will earn zero economic profit. B. In the short-run, the equilibrium price and the number of firms will increase and firms will earn positive economic profits, and in the long-run, the number of firms will be unchanged and firms will earn zero economic profit. C. In the short-run, the equilibrium price and the quantity each firm produces will increase and firms will earn positive economic profits, and in the long-run, the number of firms will increase and firms will earn zero economic profit. D. In the short-run, the equilibrium price and the number of firms will increase and firms will earn zero economic profits, and in the long-run, the number of firms will be unchanged and firms will earn zero economic profit.
A. Yes, increased demand will increase the market price; thus, each firm will operate at a point above and to the right of minimum average cost in the short run. A. In the short-run, the equilibrium price and the quantity each firm produces will increase and firms will earn positive economic profits, and in the long-run, the number of firms will be unchanged and firms will earn zero economic profit.
Why would high transaction costs or imperfect information tend to prevent price-taking behavior? A. allows products to seem more homogeneous. B. discourage customers from buying from rival firms. C. make the demand curves firms face more horizontal. D. enables firms to enter the market without being detected. E. prevent firms from setting prices without losing customers.
B. discourage customers from buying from rival firms.
If society only cared about maximizing producer surplus, the competitive market A. maximizes producer surplus because firms extract surplus from consumers. B. does not maximize producer surplus because firms can increase profits by restricting output to raise price. C. maximizes producer surplus because firms produce where price equals marginal cost. D. does not maximize producer surplus because firms do not produce all profitable units of output. E. maximizes producer surplus because firms are price takers.
B. does not maximize producer surplus because firms can increase profits by restricting output to raise price.
Suppose the production function for a certain device is: q = L + K. If neutral technical change has occurred, which of the following could be the new production function? A. q = L + 5K B. q = 5 × (L + K) C. q = 5L + K D. All of the above are possible
B. q = 5 × (L + K)
The production function for a firm that uses only labor and capital shows A. the maximum amount of input that can be produced from every level of labor and capital. B. the maximum amount of output that can be produced from given levels of labor and capital. C. every amount of output that can be produced from every level of labor and capital. D. every amount of output that can be produced from given levels of labor and capital.
B. the maximum amount of output that can be produced from given levels of labor and capital.
What is the incidence of the subsidy for consumers? The incidence of the subsidy for consumers is A. the new market price minus the new average cost of production. B. the portion of the subsidy consumers receive divided by the subsidy. C. the new market quantity minus the original market quantity D. the new market price minus the subsidy divided by the subsidy. E. the new market quantity minus the original market quantity divided by the original market quantity.
B. the portion of the subsidy consumers receive divided by the subsidy.
Producer surplus is: A. revenue plus variable cost. B. the profit from trade minus the profit (loss) from not trading. C. the area below the market price up to the amount produced. D. the area above the supply curve up to the amount produced.
B. the profit from trade minus the profit (loss) from not trading. (revenue - variable cost)
Since 1999, the number of small state-owned enterprises (SOEs) in China has A. decreased along with the large SOEs. B. decreased, but the large SOEs continue to hold a large proportion of industrialized assets. C. remained unchanged. D. increased, but large SOEs has decreased.
B. decreased, but the large SOEs continue to hold a large proportion of industrialized assets.
If a specific subsidy (negative tax) of s is given to only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Let the market price be p, the marginal cost of production (prior to the subsidy) for the firm be MC, and the subsidy be s. To maximize profit with the subsidy, the firm should A. not change its level of production. B. increase its production until p=MC+s. C. increase its production until p=MC−s. D. decrease its production until p=MC. E. decrease its production until p=s.
C. increase its production until p=MC−s.
The distinction between the short- and long-run is made in terms of A. the variation in the product. B. the phase of the product cycle. C. the ability to change the factors of production. D. chronological time.
C. the ability to change the factors of production
Should a competitive firm ever produce when it is losing money? Why or why not? A. No, the firm should shutdown if it is making an economic loss. B. No, the firm should shutdown if it is making an accounting loss. C. Yes, as long as revenue can cover total variable costs plus any portion of fixed costs. D. Yes, as long as revenue can cover some portion of total variable costs.
C. Yes, as long as revenue can cover total variable costs plus any portion of fixed costs.
The Shaffer Auto Company has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is A. equal to the cost of the factory that was planned to be built there. B. some amount greater than $0 but less than $1 million. C. $1 million. D. $0.
D. $0
Firms maximize profit when A. MR = MC. B. the derivative of the profit function with respect to output is zero. C. the additional benefit from producing a good equals the additional cost of producing that good. D. All of the above.
D. All of the above
Suppose the cost of producing two goods, x and y, can be represented as C = ax + by + cxy. If there are diseconomies of scope, then which of the following must be true? A. a + b = minus−c B. a = b C. c≺0 D. c≻0
D. c≻0
What is the welfare effect of an ad valorem sales tax, v, assessed on each competitive firm in the market? The ad valorem sales tax will A. not affect surplus by leaving the market quantity unchanged. B. increase surplus by decreasing the market quantity. C. decrease surplus by increasing the number of firms. D. decrease surplus by increasing the market price. E. increase surplus by increasing government revenue.
D. decrease surplus by increasing the market price.
A production possibilities frontier that is a downward-sloping straight line implies A. diseconomies of scale. B. economies of scope. C. economies of scale. D. no economies of scope.
D. no economies of scope
What is the long-run welfare effect of a profit tax (the government collects a specified percentage of a firm's profit) assessed on each competitive firm in a market? Assume the market is in long-run equilibrium before the profit tax. Also assume the profit tax is on economic profit. The tax on economic profit will A. decrease surplus by driving firms out of business. B. decrease surplus by decreasing the market quantity. C. decrease surplus by decreasing firm profit. D. not affect surplus by leaving the market price unchanged. E. increase surplus by increasing the market price.
D. not affect surplus by leaving the market price unchanged.
Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will A. increase by $100. B. decrease by $100. C. increase by $100 divided by the amount of grass cut. D. not change.
D. not change.
Initially, the market price is p=15, and the competitive firm's average variable cost is 16, while its average cost is 19. Should it shut down? Why? This firm should A. not shut down because average fixed cost is less than the market price. B. shut down because average fixed cost is less than the market price. C. shut down because average cost is greater than the market price. D. shut down because average variable cost is greater than the market price. E. not shut down because average cost is greater than average variable cost.
D. shut down because average variable cost is greater than the market price.
Navel oranges are grown in California and Arizona. Assume that all firms initially have the same costs, and there is unlimited entry. If Arizona starts collecting a specific tax per orange from its firms, what happens to the long-run market supply curve? A. Long-run supply will have a stairstep. B. Long-run supply will shift up by the amount of the tax. C. Long-run supply will become upward sloping. D. Long-run supply will not be affected.
D. Long-run supply will not be affected.
Does a firm's producer surplus differ from its profit if it has no fixed cost? Profit equals A. producer surplus minus variable costs. B. producer surplus plus consumer surplus. C. producer surplus minus the cost of production. D. producer surplus multiplied by the output produced. E. producer surplus minus fixed costs; therefore, if there are no fixed costs, then a firm's producer surplus and profit are equal.
E. producer surplus minus fixed costs; therefore, if there are no fixed costs, then a firm's producer surplus and profit are equal.
A shock causes the demand curve to shift to the right. What properties of the market are likely to lead to a large increase in the equilibrium price? Such a shock will lead to a larger increase in the equilibrium price if A. the demand shift is smaller. B. firms are price takers. C. there are more firms. D. supply is more elasticsupply is more elastic. E. the supply curve slope is steeper.
E. the supply curve slope is steeper.
A profit-maximizing competitive firm produces the amount of output at which...
MC(q) = p & MR = p
Equation for market supply
Q = n(p/#) Market supply equals the sum of the individual firms' supply.
What is the short-run and long-run effect on firms and market equilibrium of the U.S. law that requires firms give their workers six months' notice before they can shut down a plant? In the short run, market price _____ , market quantity _____ , and the quantity produced by an individual firm _____ . In the long run, market price _____ , market quantity _____ , and the quantity produced by an individual firm _____.
Short run: decreases increases increases Long run: remain unchanged remain unchanged remain unchanged
Assume short-run production. Indicate whether the statement below is true (T) or false (F). The difference between the total cost and the total variable cost is a constant. When total cost or total variable cost is increasing, there are increasing marginal returns to the variable input. Changes in fixed costs do not affect the shape or placement of the total cost curve. The marginal cost is the slope of the total cost curve or the total variable cost curve. The average cost curve is everywhere above the average variable cost curve. The marginal cost at a particular output level is the slope of a line from the origin to the corresponding point on the cost curve.
T F F T T F
Producer surplus is the area:
above the supply curve and below the market price up to the amount produced (revenue - variable cost) or (Sum of p-MC)
Identify the returns to scale in the functions below. q = 3L + 2K q = (2L + 2K)^0.5 q = 3L x K^2 q = L^0.5 x K^0.5 q = 4L^0.5 + 4K
constant decreasing increasing constant decreasing
What is the effect on the short-run equilibrium of a specific subsidy of s per unit that is given to all n firms in a market? What is the incidence of the subsidy? The market price will _____ , the profit-maximizing output of each firm will _____ , and the equilibrium market quantity will _____ .
decrease increase increase
The period it takes for all inputs to be varied, that is, the long-run period, is ______ for different types of firms.
different
Equation for a firm's residual elasticity of demand (ei)
ei = ne - (n-1)no