exam 2 Micro study guide

A firm's producer surplus equals its economic profit when

Fixed costs are zero.

Which of the following statements is true regarding the relationship between returns to scale and economies of scope?

There is no definite relationship between returns to scale & economies of scope.

If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth

They are more likely to become takeover targets of profit-maximizing firms.

Higher input prices result in

Upward shifts of MC and reductions in output.

The market demand for boats has been estimated as: P=40-Q Where P is price($/yard) and Q is quantity of sales (hundreds of yards per month). The market supply is estimated as P=10+Q A typical firm in this market has a total cost function given As: C=100+10q+0.5q^2 Hence, MC=10+q A) Determine the equilibrium market output and price B) Determine the output for a typical firm. C)

A) Equate supply to demand to get equilibrium Q: 40-Q=10+Q Q= 15(hundreds of yards per month) P= $25/yard B) The typical firm produces the output at which MC equals P. MC=P 10+q=25 q=15 Remember to check out average variable cost at 15 (If AVC there is >25, the firm shuts down) : AVC(15)=10+(0.5)(15)<25

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

A) MRTS=MPl/MPk.

Which of the following relationships is not valid?

A) rising marginal cost implies that average total cost is also rising

In a constant-cost industry, an increase in demand will be followed by

An increase in supply that will bring price down to the level it was before the demand shift.

A firms total cost function is given by this equation TC(Q)=100+Q+Q^2 And the marginal cost function is given by: MC(Q)=1+2Q Determine the quantity that minimizes average total cost. A firms total cost function is given by the equation TC(Q)=100+Q+Q^2 and the marginal cost function is given by MC(Q)=1+2Q. Determine the quantity that minimizes average total cost.

Average total cost=Total cost/Q=100/Q+1+Q. When the average total cost is equal to the marginal cost, average total cost is at its minimal level. So we need to find Q at which MC=ATC 100/Q+1+Q=1+2Q Q=10

Consider the following statements when answering this question: 1) With convex isoquants, a firm's expansion path cannot be negatively sloped 2) If a firm uses only two factors of production, one of whose marginal product becomes negative when its use exceeds a certain level, then a cost-minimizing firm's expansion path will have vertical or horizontal segments.

Both are true.

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

Bubba adds grilled chicken sandwiches to the menu.

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 or less capital.

Assume that a firms production process is subject to increasing returns of scale over a broad range of outputs. Long run average costs over this output will tend to

Decline

Use the following two statements to answer this question: I. Increasing returns to scale cause economies of scale. II. Economies of scale cause increasing returns to scale.

I - TRUE II - FALSE

A firm employs 10 workers at a wage rate of $12 per hour, and 10 units of capital at a rate of $20 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

Is producing its current output level at the minimum cost.

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. As you increased the number of employees hired per hour from three to five, your total output increased by 5 cars to 15 cars per hour. What is the average product of labor at the new levels of labor?

MP=1.5 cars

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:

P=MC

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In those case, the market level supply curve is blank and producer surplus equals?

Perfectly elastic, 0

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?

Prices are relatively low

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as

Producer surplus is positive

If the market price for A competitive firms output doubles then

The marginal revenue doubles

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.

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 cost-output elasticity equals 1.5. This implies that

There are diseconomies of scale

The cost output elasticity equals 1.4. This implies that:

There are diseconomies 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

The cost-output elasticity is used to measure:

economies of scale

The supply curve for a competitive firm is

its MC curve above the minimum point of the AVC curve.