Econ 323

Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?

$45,000 per year// The economic cost is the opportunity cost. By earning a salary and manages his own firm, Jim gives up the opportunity to earn additional $70000-$25000.

The law of diminishing returns applies to:

All the above three answered are awarded points, although I recommend A. In the short run, there is a fixed input that cannot be adjusted, which can finally become a constraint that prevents other factors to work efficiently when the output level is high. This results in the law of diminishing returns. However, the third paragraph on page 196 of the textbook also mentions that "the law of diminishing marginal returns usually applies to the short run when at least one input is fixed/ However, it can also apply to the long run..." and provides an explanation. That is why I give credits to C and D too.

Use the following two statements to answer this question: I. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing. II Diminishing returns to all factors of production implies decreasing returns to scale.

Both I and II are false.

) Consider the following statements when answering this question: I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price.

I is true, and II is false.

Use the following statements to answer this question: I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left. II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.

I and II are false.// Short-run supply curve is the portion of MC curve above AVC curve. Both curves do not depend on fixed cost.

Consider the following statements when answering this question: I. Whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve. II. If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands.

I is false, and II is true.

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees?

MP = 1.5 cars

) Which of the following is NOT an expression for the cost minimizing combination of inputs?

MRTS = MPL /MPK

What describes the graphical relationship between average product and marginal product?

Marginal product cuts average product from above, at the maximum point of average product.

Suppose a production function has MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour?

One hour// Solution: We can compute MRTS=400/(4*100)=1. This means that if we reduce the capital by 1 unit, the labor has to increase by 1 unit in order to maintain the same level of production.

Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of cheese increases, what is the expected impact on Ronny's profit-maximizing output decision?

Output decreases because the marginal cost curve shifts upward.

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

Sell to ABC Corporation. // By selling to ABC today, the farm receives $500,000. After one year investment, this amount becomes $550,000.

A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale?

The short-run average cost curve reveals nothing regarding returns to scale.// The shape of the firm's short-run curve is related to diminishing return or increasing marginal cost. In the short-run, there is a fixed input that cannot be changed, and thus we cannot talk about "doubling all inputs". Returns to scales are long-run effects where all inputs are changeable. If the long-run cost curve is U-shaped, it has economies of scale in the decreasing portion and diseconomies of scale in the increasing portion.

Suppose we plot the total revenue curve with quantity on the horizontal axis and revenue on the vertical axis (as in Figure 8.1 in the book). Under price-taking behavior, the total revenue curve should be:

a straight line from the origin with slope equal to the market price.// Under the price taking behavior, revenue=price*quantity. Price is a constant number, which is the slope of the revenue curve.

A firm's expansion path is:

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen,

average product is rising. Marginal product is higher than average product. Hence, AP is increasing.

The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ________ and supply is relatively ________.

inelastic; elastic

Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:

continue producing in the short run, but plan to go out of business in the long run. // The price is higher than AVC, and thus the firm produces a positive amount in the short run. However, the profit is negative. Hence, in the long run, the firm chooses to exit the industry.

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:

could reduce the cost of producing its current output level by employing more labor and less capital. // We apply the equal margin principle. Marginal product per dollar of labor is 3/10=0.3. Marginal product per dollar of capital is 5/21, which is around 0.24. Hence, the firm should use more of labor, which will decrease marginal product per dollar of labor and increase marginal product per dollar of capital and making the two ratios closer to the cost-minimization condition.

Price ceilings can result in a net loss in consumer surplus when the ________ curve is ________.

demand; very inelastic

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will:

follow the 45-degree line from the origin.// The isoquants will be L-shaped lines with kinks lying on the 45-degree line. The cost-minimizing input bundle always lie on the 45-degree line. Hence, the expansion path is the 45-degree line

Envision an isoquant map with all isoquants bow in towards the origin. The distance between isoquants q=100 and q=50 is closer than the distance between isoquants q=50 to q=0. Then the production function exhibits:

increasing returns to scale, because doubling inputs results in more than double the amount of output.

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:

is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.

When the average product is decreasing, marginal product:

is less than average product.

If a competitive firm's marginal cost curve is U-shaped, then:

its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve

A decreasing-cost industry has a downward-sloping:

long-run industry supply curve.

Short-run supply curves for perfectly competitive firms tend to be upward sloping because:

marginal costs increase as output increases. marginal fixed costs equal zero.// A firm's short-run supply curve is the portion of MC curve that is above AVC. The essential reason why the firm has an increasing MC curve is diminishing marginal product.

At the profit-maximizing level of output, which of the statement is wrong

marginal profit is maximized. // Marginal profit is zero when total profit is maximized.

Deadweight loss refers to:

net losses in total surplus.

When an isocost line is just tangent to an isoquant, we know that:

output is being produced at minimum cost.

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

In an unregulated, competitive market producer surplus exists because some:

producers are willing to sell at less than the equilibrium price.

We manufacturer automobiles given the production function q = 5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K = 10 robots and L = 10 workers in order to produce q = 450 autos per shift, then we know that production is:

technically feasible and inefficient. The production function allows the firm to efficiently produce 5*10*10=500 unit of output. Producing 450 is feasible, i.e., technically allowed. However, this is not the efficient output level.

The marginal rate of technical substitution is equal to:

the absolute value of the slope of an isoquant, and the ratio of the marginal products of the inputs.

If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC,

the firm is earning negative profit, but will continue to produce where in the short run. // In the short-run, the firm produces a positive amount to minimize loss caused by the fixed cost.

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:

the minimum value of the firm's average variable cost lies between $5 and $10.// The discontinuity in the supply curve happens at the lowest point of the AVC curve, which is between $5 and $10 in this problem.

The short run is:

the time period in which at least one input is fixed

The cost-output elasticity equals 1.4. This implies that:

there are diseconomies of scale. // This means that when the firm increase the output by 1%, the total cost increases by more than 1%. Hence, the firm has economies of scale.

At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that:

there are economies of scale. // Solution: Long-run MC is below long-run AC. This means that long-run AC is decreasing. Hence, the firm has economy of scale. In this case, increasing the input by 1 percent results in a increasing in total cost of less than 1 percent. Hence, this firm has economies of scale.

Marginal product crosses the horizontal axis (is equal to zero) at the point where:

total product is maximized.