ECON Exam 2
1. product homogeneity 2. price taking 3. free entry and exit
3 conditions that economists typically assume are required for perfect competition
partial equilibrium
A _____ is an equilibrium in one market, ignoring the rest of the economy.
a production function
A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called
B. It should keep output the same.
A perfectly competitive firm is producing the output that maximizes its profit. If its fixed cost increases, and industry price remains constant, how should it respond in the short run? A. It should produce more output. B. It should keep output the same. C. It should raise its price. D. It should produce less output. E. It should shut down.
B. price is below minimum average variable cost.
A perfectly competitive firm should shut down in the short run if A. price is below minimum average total cost. B. price is below minimum average variable cost. C. it cannot earn a profit. D. the firm does not earn enough to pay for all its fixed costs.
variable input fixed input
A production input that can be varied in both the short run and the long run is called a _____. A production input that can only be varied in the long run is called a _____.
equilibrium
An _____ is a set of prices and quantities such that 1. firms are maximizing profit 2. consumers are maximizing utility 3. markets clear
D. all the input combinations that can be purchased at a given total cost.
An isocost line shows A. the total cost of producing each possible level of output. B. all the input combinations that produce the same total output. C. all the possible output levels that can be produced at a given total cost. D. all the input combinations that can be purchased at a given total cost.
A. average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average.
Assume that the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? Explain. If the marginal cost of production is greater than the average variable cost of production, then A. average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. B. average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average. C. average variable cost is rising because the cost of the last unit produced is adding to total variable cost. D. average variable cost could be rising or falling because marginal cost and average variable cost are unrelated. E. average variable cost is rising because marginal cost and average variable cost are equal.
D. average variable cost equals marginal cost.
At the point where average variable cost reaches its minimum value A. average variable cost equals average total cost. B. marginal cost also reaches its minimum value. C. marginal cost equals zero. D. average variable cost equals marginal cost.
C. No. It would imply that adding more of both inputs keeps output constant.
Can an isoquant ever slope upward? Explain. A. Yes. If both inputs are inferior, then the isoquant is upward sloping. B. Yes. Where diminishing returns occur, the isoquant is upward sloping. C. No. It would imply that adding more of both inputs keeps output constant. D. No. It would imply that adding more of both inputs decreases output.
A. diseconomies of scale
Does the following cost function exhibit economies of scale, diseconomies of scale, or neither? C(w,v,q) = 20q^6/4 A. diseconomies of scale B. economies of scale C. neither
C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. decreases will not change
Explain the term "marginal rate of technical substitution." (Assume a two-input production function.) A. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to keep output constant. B. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output increases. C. The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. D. The MRTS gives the amount by which the quantity of one input must be increased when one extra unit of another input is used to increase output by one unit. What does a MRTS = 2 mean? It means that if the input on the horizontal axis is increased by one unit, then the input on the vertical axis _____ by 2 units and output _____.
B. Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables.
Faced with constantly changing conditions, why would a firm ever keep any factors fixed? What criteria determine whether a factor is fixed or variable? A. Some factors are simply fixed inputs by definition. For example, plant and equipment are fixed inputs regardless of the time horizon. B. Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables. C. The production of most goods requires the use of both fixed and variable inputs. Fixed inputs are inputs that are not consumed during the production process, while variable inputs are consumed during the production process. D. Some factors are fixed in the short run, whether the firm likes it or not, simply because the firm may not have the resources to adjust the level of the variables.
law of diminishing marginal returns
Holding other inputs fixed, increasing the use of an input will eventually result in decreasing amounts of additional output. This is called the _____.
D. decrease its output.
If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal cost, it should A. decrease its price. B. increase its output. C. shut down. D. decrease its output. E. increase its price.
B. the inputs are perfect substitutes.
If a production function has straight line isoquants, then A. there are constant returns to scale. B. the inputs are perfect substitutes. C. the industry is a constant cost industry. D. All of the above are true.
E. they will produce where price equals marginal cost.
If firms are price takers, then A. they will have market power. B. they will produce where price equals average total cost. C. they will earn zero economic profit. D. they will produce where marginal revenue is less than marginal cost. E. they will produce where price equals marginal cost.
D. firms will produce at minimum average cost in the long run.
If firms can easily enter and exit a market, then Part 9 A. firms will produce where price is greater than marginal cost. B. firms will produce where price is greater than marginal revenue. C. firms will produce at minimum average fixed cost in the long run. D. firms will produce at minimum average cost in the long run. E. firms will earn zero economic profit in the short run
B. products will be perfectly substitutable with one another.
If firms produce a homogeneous product, then A. the market may have multiple prices. B. products will be perfectly substitutable with one another. C. consumers will be willing to pay different prices for output from different firms. D. market output will not be a commodity. E. individual firms can raise price without losing all sales.
C. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market.
What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? For a market to be perfectly competitive, A. firms must have market power, firms must produce a differentiated product, and firms must be able to easily enter and exit the market. B. only one firm can produce output, no close substitutes may exist, and firms must not be able to enter the market. C. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market. D. only one firm can have access to a key input, the government must regulate entry of new firms, and the long-run average cost of production must be decreasing. E. only a few firms may produce output, firms must have market power, and firms must produce a homogenous product.
economic costs accounting costs opportunity costs
The _____ is the total cost of utilizing resources. It includes the _____, which consists of actual expenditures (plus depreciation of capital), and the _____, which is the cost of forgoing the next best alternative.
marginal product of labor
The additional output from a small increase in labor is called the _____.
Convex isoquant - B Linear isoquant - A L-shaped isoquant - C
Isoquants can be convex, linear, or L-shaped. What does each of these shapes tell you about the nature of the production function? What does each of these shapes tell you about the MRTS? (For each of the following, enter the letter of the description that best describes each type of isoquant.) A. The slope, or the MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input and output can be maintained. The inputs are perfect substitutes. B. Within some range, a declining number of units of one input can be substituted for a unit of the other input, and output can be maintained at the same level. In this case, the MRTS is diminishing as we move down along the isoquant. C. The inputs are perfect complements, or that the firm is producing under a fixed proportions type of technology. In this case, the firm cannot give up one input in exchange for the other and still maintain the same level of output.
E. a time period in which at least one input is fixed.
The short run is A. a time period in which at least one set of outputs has been decided upon. B. less than a year. C. however long it takes to produce the planned output. D. three years. E. a time period in which at least one input is fixed.
C. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.
What is the difference between a production function and an isoquant? Part 2 A. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output. B. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output. C. A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output. D. A production function describes the minimum output that can be achieved with any given combination of inputs. An isoquant identifies the different types of inputs that can be used to produce various levels of output.
D. the isoquant line is tangent to the isocost line.
When the cost minimizing combination of inputs is being used and there is no corner solution, A. the marginal product of each input is equal to its cost. B. the marginal products of the inputs are equal to each other. C. the costs of the inputs are equal to each other. D. the isoquant line is tangent to the isocost line. E. All of the above.
B. revenue is greater than variable costs, resulting in smaller losses than would result from shutting down.
Why would a firm that incurs losses choose to produce rather than shut down? In a perfectly competitive industry, if a firm is incurring losses, then it might choose to produce in the short run because A. average fixed cost becomes zero in the long run, resulting in profit in the long run. B. revenue is greater than variable costs, resulting in smaller losses than would result from shutting down. C. revenue is greater than fixed costs, resulting in smaller losses than would result from shutting down. D. price is greater than average variable cost, resulting in profit in the long run. E. variable costs are greater than fixed costs, resulting in smaller losses than would result from shutting down.
Marginal product
additional output produced from an increase in an input
Sunk cost
an expenditure that has already been made and cannot be recovered
Accounting costs
consist of actual expenditures incurred by the firm (plus depreciation of capital)
Product homogeneity
products are very similar to each other (or perfect substitutes for each other). 1 important implication: each firm will face an infinitely elastic demand curve
Short-run total cost function
specifies the cost of output when capital is fixed at k0
Factors of production
specifies the maximum amount of output, q, that can be produced from any combinations of inputs, (l,k)
Price taker
takes the prices as given, rather than influencing them with their supply decisions
Cost function
tells us how cheaply q units of output can be produced, given prices of labor and capital
marginal rate of technical substitution
the absolute value of the slope of an isoquant at any point
Opportunity cost
the cost of forgoing the next best alternative
Isocost Line
the set of all combinations of labor and capital that cost the same amount
Free entry (or exit)
there is no special cost that make it difficult for a new firm to enter or exit an industry
Economic cost
total cost of utilizing resources
C. there will eventually be diminishing marginal products for the firm's variable inputs.
In the short run when some inputs are fixed, marginal cost must eventually rise as a firm's output increases because A. there will eventually be decreasing returns to scale. B. the prices the firm pays for labor, material and other variable inputs will increase. C. there will eventually be diminishing marginal products for the firm's variable inputs. D. All of the above
D. all the combinations of inputs that yield the same total output.
Question content area Part 1 An isoquant is a curve that shows A. the optimal combination of inputs to use to produce any given level of output. B. all the output levels that can be produced from a given set of inputs. C. all the combinations of inputs that cost the same total amount. D. all the combinations of inputs that yield the same total output.