Micro 201 7-12

Marginal revenue:

The change in total revenue resulting from the sale of one more unit.

Compare the outcomes (prices, outputs, profits, and economic efficiencies) of a competitive market and one in which the producers are able to act and set prices as though they were a monopoly. Why would antitrust law try to accomplish?

. Antitrust law should try to create a more competitive industry in which price is closer to marginal cost and the industry comes closer to allocative efficiency.

What is the average score if the third student has an SAT score equal to 1000?

1200

What is the average score if the third student has an SAT score equal to 1600?

1400

If the cost of that additional automobile is $12,000, what is the new average?

14000

Suppose that a factory is producing two automobiles per hour. The total fixed cost is $20,000. The total variable cost is $10,000. The average cost is

15000

Given the previous two questions, suppose that we now increase production by one automobile per hour. If the cost of that additional automobile is $18,000, what is the new average?

16000

The production of 12,000 candy bars per day requires 60 workers. The average product of each worker is ______________ candy bars per day. A 12,000 B 600 C 200 D 20

200

Which of the following is NOT true regarding perfectly competitive markets? A It is difficult or impossible for a firm to enter and compete in the market B All firms in the market are price takers C Homogenous goods are sold by the firms D The market contains many buyers and sellers

A It is difficult or impossible for a firm to enter and compete in the market

Accounting profits at a firm's economic profit break-even point are ________. A Positive B Negative C Zero D Equal to the firm's total revenue

A Positive

For any firm, what is the long-run average cost curve? A A downward sloping line B A function which shows the lowest average cost of producing any output level C The same as the long-run marginal cost curve D Upward sloping at all levels of output

A function which shows the lowest average cost of producing any output level

Economic profits

Accounting profits minus normal profits.

Total costs

All costs of producing a specific amount of output.

constant cost industry

As the industry expands, prices of inputs do not change

Suppose a firm doubles its inputs in the long-run, and as a result, output doubles. Which of the following is true? A This firm is experiencing economies of scale. B This firm is experiencing constant returns to scale. C This firm is not using the lowest cost combination of capital and labor. D This firm is growing too fast and reducing profits.

B This firm is experiencing constant returns to scale.

In the case of an increase in fixed costs, what will happen to the economic profits of the typical competitive firm? Economic profits will ________. A Not change B Increase C Decrease D Cannot tell

C Decrease

Why can't a single firm in a perfectly competitive industry influence the market price? A Its costs are too high B It is not allowed to advertise C Its production level is too small to affect the market D It is a price maker

C Its production level is too small to affect the market

marginal analysis

Comparing the additional benefits resulting from a decision with the marginal costs.

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A Not change; not change B Increase; decrease C Decrease; increase D Not change; increase

Decrease; increase

An electric power plant most likely experiences which of the following? A Constant returns to scale B Economies of scale C Diseconomies of scale

Economies of scale

as a firm increases output, long-run average costs typically _________. A Rise, peak, then fall B Fall, hit a minimum, then rise C Increase gradually D Remain constant

Fall, hit a minimum, then rise

capital

Machines, tools, buildings, and inventories.

Total revenue:

The number of goods sold multiplied by the price at which they are sold.

Average revenue

Total revenue divided by the quantity sold.

Accounting profit

Total revenue minus explicit costs. Accounting profit that could be earned elsewhere is not counted as a cost.

accounting profits

Total revenues minus explicit costs.

long run

a time period long enough that all inputs can be changed

monopolistically competitive

an industry with many different competitors with slightly different products

Explain, in your own words, why marginal revenue for a monopolist declines as output increases.

as monopolies raise their prices the opposite happens. The new higher price will mean more revenue gained from the higher price - but it means less revenue from the fall in the number of goods sold.

In a model with only labor and capital as inputs, in the short run the amount of ______________ is fixed, while in the long run the amount of ______________ is variable.A Capital, capital B Either labor or capital, both labor and capital C Both labor and capital, either labor or capital D Labor, labor

b

In the case of an increase in demand, what will happen to the economic profits of the typical competitive firm? Economic profits will ________. A Not change B Increase C Decrease D Cannot tell

b

Marginal revenue is only positive when demand is _______. A Elastic B Inelastic C Neither elastic nor inelastic

c

In the long run, a monopolist facing the same cost curves as a perfectly competitive firm will charge a ______________ price than the competitive market and produce a ______________ output. A Lower; higher B Lower; lower C Higher; higher D Higher; lower

d

What are economic profits at a firm's break-even point? Positive and equal to fixed costs B Positive and equal to opportunity costs C Negative D Zero

d

Explain in your own words why average product can increase even when the marginal product decreases, as long as marginal product is still above the average product.

ecause marginal cost and average product are attracted to one another

Peter can produce 50 lunches per hour for $1,250. If he hires one more cook for $15 an hour, he can produce 55 lunches per hour. The marginal cost of expanding hourly lunch production from 50 to 55 is _____.

$3.00

Consider two students, each earning 1300 on the quantitative and verbal portions of the SAT. The average SAT score for our group of two is 1300, of course. (1300 + 1300)/2. Suppose we add one more student to the group and calculate the new average. What will the new average be if the third student has an SAT that is equal to 1300?

1300

If the average product of labor is 12 units of output per worker per day when eight workers are hired, eight workers will be able to produce ______________ units per day.

96

In the short run, how will a decrease in variable costs affect the output of a typical firm in a competitive market? A An increase in output B A decrease in output C No change in output D Cannot tell

A

At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. The variable cost of producing 1,000 units of output per week is equal to _____. A $16,000 B $41,000 C $16 D $41,000,000

A $16,000 Total cost of production is fixed plus producing

Economic profits are ______________ than accounting profits. A Always less B Always more C Sometimes more D Sometimes less

A Always less

In the short run, how will an increase in demand affect the output of a typical firm in a competitive market? A An increase in output B A decrease in output C No change in output D Cannot tell

A An increase in output

If the long-run average cost curve is horizontal, it implies that the firm is experiencing _________. A Constant returns to scale B Technical efficiency of inputs C Constant total costs D Unchanging levels of production

A Constant returns to scale

The marginal product of an automobile assembly line worker is currently one automobile per month. The wage and benefits of that typical worker is currently $4,000 per month. A new robot will cost $20,000 per month and its marginal product is four automobiles per month. If the automobile company wants to continue producing its current level of output, which of the following should it do? A Hire more labor and buy fewer robots B Hire less labor and buy more robots C Hire more labor and more robots D Change neither the current levels of labor or robots

A Hire more labor and buy fewer robots

An increase in the prices of an input will cause long-run average costs to A Increase B Decrease C Not change. The input is fixed. D Either increase or decrease, depending upon whether variable inputs are substituted.

A Increase

Assume the price of coffee increases. If the market for tea is perfectly competitive and a constant cost industry, what will happen to the tea market in the long run? Output will ______________; prices will ______________; and economic profits will ______________ Indicate whether increase, decrease, cannot tell, or no change as before the price shift is correct for each blank space. A Increase; not change; not change B Decrease; increase; increase C Increase; not change; decrease D Decrease; decrease; not change

A Increase; not change; not change

Regulators of a natural monopoly concerned most with economic efficiency will set prices equal to ________. A Marginal cost B Average cost C The price that would be charged in a perfectly competitive market D Marginal revenue E A level that will result in the monopolist producing the quantity where average costs are at a minimum

A Marginal cost

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market. A Not change; not change B Increase; increase C Decrease; increase D Not change; increase

A Not change; not change

A single firm in a perfectly competitive market is a _________.'A Price-taker B Price-maker C Quantity-taker D Quality-maker

A Price-taker

For a firm in a perfectly competitive market, average revenue equals ________. A The market price B Average total cost C Fixed cost D Price divided by quantity

A The market price

price takers

A firm "takes" the price that is given by the market supply and demand conditions. The firm can do nothing to change that price.

Price-taker

A firm "takes" the price that is given it by the market supply and demand conditions. The firm can do nothing to change that price.

Natural monopoly:

A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

natural monopoly

A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

natural monopolist

A firm that can produce at lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

Predatory pricing

A firm that lowers prices with the purpose of driving competitors out of a market, increasing its own market power, and eventually reducing output and raising prices is engaging in predatory pricing.

Predatory pricing:

A firm that lowers prices with the purpose of driving competitors out of a market, increasing its own market power, and eventually reducing output and raising prices is engaging in predatory pricing.

Firm supply:

A firm's quantity supplied at each price level.

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry.

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry.

Concentration ratio

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry. Other similar measures, that indicate the degree of market power and competitiveness, are often used.

trust

A group of firms who have legally agreed to work together often in ways that will reduce competition among those firms.

cartel

A group of producers agreeing to act in concert with one another.

Perfectly competitive markets:

A market with many buyers and sellers, with each seller offering the same good or service. Consumers and producers are aware of quality of inputs and goods and prices. Firms can easily enter and exit the industry.

payoff maytrix

A payoff matrix is usually a two-by-two table with two actors or players. Each player will have a set of actions that will result in different payoffs. Each player's payoff is dependent on both players' course of action.

short run

A period in which there is insufficient time to change all of the inputs. That is, some inputs are fixed.

long run

A period that is long enough so that all inputs into a production process can be varied. (or that inputs can change.)

Average cost pricing

A price, set by a regulator of a natural monopoly, equal to average cost at the corresponding quantity demanded.

Marginal cost pricing

A price, set by a regulator of a natural monopoly, equal to marginal cost at the corresponding quantity demanded.

marginal cost pricing

A price, set by a regulator of a natural monopoly, equal to marginal cost at the corresponding quantity demanded.

technological change

A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of creation of new products, redesign of old products, or the creation of new methods of manufacturing.

monopoly

A single firm in an industry with barriers to entry and no close substitute goods

What is true about the long-run for a firm? A At least one input cannot be changed B The firm only uses one of either capital or labor, whichever is cheapest C All inputs can be changed D No inputs can be changed

All inputs can be changed

labor

All the physical and mental inputs of people

Oligopoly:

An industry with few producers, high entry barriers, and each one has market power. They compete on either price or quantity and may charge the same or different prices.

Monopolistic competition:

An industry with many competitors, all producing slightly different products.

Entry Barriers:

Any impediment that makes entry into a market difficult or impossible for new firms.

barriers to entry

Any impediment that makes it difficult or impossible for a new firm to enter and compete in a market.

Is it possible for marginal cost to be falling and average cost to be rising?

As long as marginal cost is greater than average cost, average cost will be rising. But if you draw a graph with both marginal cost and average cost (such as in Figure 7.12) you will see that for every point that average cost is rising, not only is marginal cost greater than average cost but it is also rising.

increasing cost industry

As the industry expands, prices of inputs increase±±

What does diminishing marginal productivity mean?

As you increase the amount of a variable input, its marginal product eventually gets smaller. While a and d might eventually happen if the marginal product diminishes, b represents the definition of diminishing marginal productivity. C is not possible because the fixed input cannot change in the short run (and diminishing marginal productivity is a short-run concept).

Regulators of a natural monopoly concerned most with the monopoly's profits will set prices equal to ________. A Marginal cost B Average cost C The price that would be charged in a perfectly competitive market D Marginal revenue E A level that will result in the monopolist producing the quantity where average costs are at a minimum

Average cost

technical efficient

Average costs, at every possible level of output, are at minimums. That is the firm would minimize average cost for its current level of output. The second part of technical efficiency is that the firm is producing a level of output that results in the minimum of all of those possible average costs.

A profit-maximizing monopolist produces where marginal cost is equal to ________. A Price B Marginal revenue C 0 D The minimum

B

At 600 units of output, total fixed cost is equal to $1,000 and total variable cost is equal to $12,000. Total cost is equal to _______.

B $13,000

Consider the effect on costs of an increase in wages in an economy. What is the increase likely to do? A Increase short-run average costs, but not increase long-run average costs. B Increase short-run average costs and long-run average costs. C Increase long-run average costs, but not increase short-run average costs. D Increase neither short-run or long-run average costs, businesses will use less labor and more capital.

B Increase short-run average costs and long-run average costs.

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market. A Not change; not change B Increase; decrease C Decrease; increase D Not change; increase

B Increase; decrease

Suppose a firm doubles its inputs (therefore doubling its total costs as well). If this firm is experiencing diseconomies of scale, then __________. A Output will double B Output will increase, but less than double C Output will remain the same D Output will decrease

B Output will increase, but less than double

Why are perfectly competitive markets are considered economically efficient? A There is only a small amount of deadweight loss B The opportunity cost of society for making the good is equal to society's value of the good. C Consumers enjoy the goods produced in these markets most D Firms always have low and identical costs

B The opportunity cost of society for making the good is equal to society's value of the good.

For a firm, the short-run is defined as being __________. A A period of time less than one year B A period of time less than one month C A period of time in which at least one of the firm's inputs is unchangeable D A period of time in which all the firm's inputs are variable

C A period of time in which at least one of the firm's inputs is unchangeable

A firm engaged in predatory pricing will set its price in which of the following ways? Below the marginal cost B Below the average variable cost in the short run C Below the average cost to drive out competition and then increase price D Below the marginal cost even if it has many competitors and is a price taker

C Below the average cost to drive out competition and then increase price

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________. A Not change; not change B Increase; decrease C Decrease; increase by more than in the short run D Decrease; increase less than in the short run

C Decrease; increase by more than in the short run

Assume that competitive firms and a competitive market are in long-run equilibrium. In the short run, what will be the effects of an increase in fixed costs on the output of a typical firm in a competitive market? A An increase in output B A decrease in output C No change in output D Cannot tell

C No change in output

Assume the following data. The marginal product of labor is 150 washed cars per day. The daily wage is $60. If the marginal product of machines that would wash cars is 200 per day and the rent for the machines is $80, what will the firm do? A Rent more machines, because their marginal products are higher B Hire more workers, because they cost less per day C Not change the number of machines or workers D Expand both the number of machines and workers

C Not change the number of machines or workers

The addition of a single firm in a competitive market will cause the market ______________ to ______________. A Demand; increase B Demand; decrease C Supply; increase D Supply; decrease E Supply and demand; not change

C Supply; increase

Suppose an additional worker can handle an additional 10 orders per hour. That will cost $15 per hour. An additional telephone answering machine will handle an additional 20 calls per hour at a cost of $10 per hour. Which of the following is correct? A The firm should increase labor and decrease capital, because labor costs more per hour. B The firm should increase capital and decrease labor, because labor produces less per hour. C The firm should increase capital and decrease labor, because labor produces less per dollar spent. D The firm should increase labor and decrease capital, because labor produces less per dollar spent.

C The firm should increase capital and decrease labor, because labor produces less per dollar spent.

The amount of time a firm operates with the ability to make long-run decisions is how long? A Between five and ten years B Greater than five years C Greater than two years D Differs by industry

D

What is a reason that monopolies exist? A A firm owns a resource that no one else has B A firm is given legal protection that prevents another firm from entering C A firm naturally drives out competitors through lower prices. D All of the above are reasons

D

Use the information from the table. If the weekly wage is $200, the marginal cost of increasing weekly production from 10 to 22 scarves per week is ______________ than the marginal cost of increasing weekly production from 40 to 46 scarves per week because the marginal product of the second worker is ______________ than the fifth worker. Higher, higher B Lower, lower C Higher, lower D Lower, higher

D Lower, higher The marginal product if the second worker is 12 while the marginal product of the fifth worker is 6. Therefore, the cost of each additional unit the fifth worker produces is twice as much as each unit the second worker produces.

In the theory of firm behavior, we assume that firms attempt to maximize _________. A Total revenue B Marginal revenue C The number of customers D Total economic profits

D Total economic profits

Diminishing marginal returns means that marginal product will eventually ______ and marginal cost will eventually _______.

Decrease; increase

The law of diminishing marginal returns is the cause of ______________ marginal product and ______________ marginal cost.

Decreasing; increasing

A long-run average cost curve that rises through all levels of possible outputs represents which effect? A The law of diminishing marginal returns B Economies of scale C Diseconomies of scale D None of the above

Diseconomies of scale

In a perfectly competitive industry, the industry demand curve is __________. A Upward sloping B Downward sloping C Horizontal D Vertical

Downward sloping

Which of the following is a characteristic of perfect competition? A Differentiated products B A small number of firms competing C Easy entry for firms D None of the above

Easy entry for firms

Suppose firms face increasing returns to scale throughout the range of possible firm sizes. Discuss the advantage and disadvantages, in terms of economic efficiency, of allowing a single firm to dominate the market.

Economic efficiency will be enhanced. However, the single firm will not produce an amount that is economically efficient because of its market power. Thus, the outcome will be less than economically efficient. The dilemma is how to take advantage of the economies of scale and at the same time end up with an economically efficient amount of output.

Can you explain why prices below average variable costs or below marginal cost might be predatory pricing?

Firms would not produce a level of output where price is below marginal cost or where price is below variable average cost if they are profit-maximizing in the short run. However, if the firm saw that it could discourage competitors and then raise its price and lower output to maximize profits and earn economic profits after competing firms were forced out of the market, it might do so.

What are two of the reasons that average cost tends to have a "bowl" shape? Fixed costs tend to dominate high levels of output and variable costs tend to dominate low levels of output B Fixed costs tend to dominate low levels of output and variable costs tend to dominate high levels of output C Fixed costs and variable costs tend to dominate low levels of output D Fixed costs and variable costs tend to dominate high levels of output

Fixed costs tend to dominate low levels of output and variable costs tend to dominate high levels of output

total variable costs

For a given level of output, the costs (prices multiplied by the amounts of inputs) of the inputs that can be changed. These costs vary as output changes.

With a monopoly, marginal cost is less than price. Does that mean too much or too little is produced by a monopoly for allocative efficiency? Why?

Given that marginal cost is less than price for a monopoly, the marginal utility / marginal cost ratio for the monopoly's product will be greater than the marginal utility / marginal cost ratio for the rest of the economy, assuming that the rest of the economy is closer to being competitive. Thus, if the rest of the economy produces less and those resources are moved to the monopolistic industry, there will be a net gain in satisfaction. The monopolist, in other words, is producing too little for allocative efficiency.

Assume that wages are $20 per hour; at the current number of hours of labor employed, the marginal product of an hour of labor is 10 units of output. Labor is the only variable input. What will happen to marginal cost if you hire one more hour of labor and the marginal product of the next hour of labor employed increases to 15 units of output?

If an hour of labor produces 10 more units of output in an hour and that hour of labor costs $20, the marginal cost is (1 hour x $20) / 10 units of output. That is equal to a marginal cost of $2 per unit. If the next hour of labor's marginal product increases to 15 units per hour, the marginal cost will fall to $1.33 per unit. (1 hour x $20) / 15 units of output = $1.33 per additional unit of output.

Explain why an equality of marginal product per dollar spent on inputs minimizes costs per unit of output

If the marginal products per additional dollar spent on all inputs are not equal, a firm can reduce inputs that have lower marginal products per dollar spent and take a portion of those dollars saved and spend them on other inputs. The firm will have reduced costs as a result.

When can diseconomies of scale occur?A In the short-run B In the long-run C When total costs are falling D When average costs are falling

In the long-run

If the quantity of an input is variable in the short run, its total cost will ______________ as output increases. Increase B Decrease C Stay the same D Rise then fall

Increase

An increase in technology will cause the total product function to ______________ and average costs to ______________.

Increase; decrease

In the short run, an increase in wages (the price of the variable input) will cause average cost to ______________ and marginal cost to ______________.

Increase; increase

Given all the characteristics of perfect competition, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from? A Individual buyers and sellers cannot affect the market price. B Firms have a lot of flexibility in pricing their products. C One individual firm can determine the market price. D Some firms must necessarily leave since the prices will be too low.

Individual buyers and sellers cannot affect the market price.

How does a monopoly choose its price and output? How does this compare to the price and output in a competitive industry? Which one benefits consumers more?

Just like any other firm, the monopoly is assumed to maximize its profits by setting marginal revenue equal to marginal cost and producing at that level of output while setting the price as high as possible on the demand curve at that level of output. However, the resulting price may be higher and output lower than in a competitive market, making consumers worse off in the case of a monopoly.

In your own words, explain why a firm may face diminishing marginal returns to labor as the amount of labor used increases.

Labor may be not as productive or efficient as the amount of labor increases and the amount of work needed decreases

What is the main source of diseconomies of scale? A Physical capital breaking more often with large output levels B Specialization of capital and labor C Limited ability to manage and coordinate larger amounts of inputs D Workers getting fatigued

Limited ability to manage and coordinate larger amounts of inputs

Economies of scale happen when increases in output result in _________. A Increasing average costs B Constant average costs C Lower average costs D Lower total costs

Lower average costs

A perfectly competitive firm will maximize profits at the output level where which of the following is true?A Average cost is equal to marginal revenue B Marginal cost is total revenue C Marginal cost is equal to marginal revenue D Average total cost is equal to average revenue

Marginal cost is equal to marginal revenue

An effective price ceiling in a competitive industry will mean that which of the following is true? A Marginal cost is greater than marginal revenue. B Marginal revenue is greater than marginal cost. C Marginal cost is equal to marginal revenue. D One cannot tell because the price ceiling prohibits the competitive firms from producing at a profit-maximizing rate of output.

Marginal cost is equal to marginal revenue.

marginal product of labor

Marginal product is the change in output or product that results from increasing a variable input by one unit. This particular example is the change in the amount of output that results from a change in the amount of labor employed while holding other inputs constant. It can be calculated by dividing the change in output by the change in labor used. ^TP/^L=MP

Will a change in fixed costs change marginal cost?

No

Will a change in fixed costs change total variable cost?

No

oligopolistic industry

Only a few firms producing similar (or differentiated) products.

Why do barriers to entry allow a monopolist to make positive economic profits? A It causes the monopoly to have lower costs. B Otherwise, firms would enter the market, resulting in a decrease in price and profits. C It allows the monopoly to be price-takers. D It does not need a barrier to entry because of the market demand.

Otherwise, firms would enter the market, resulting in a decrease in price and profits.

production function

Output as a function of the amount of each input. which displays the relationship between the qualities of inputs and the total quantity of output produced in a given time period.

In perfect competition, the demand curve for an individual's firm product is _________. Downward sloping B Relatively elastic C Perfectly inelastic D Perfectly elastic

Perfectly elastic The demand is horizontal (perfectly elastic) since the firm has no control over the price. They must charge the market price for their good, meaning the firm has zero power to raise their price. If they attempt to raise the price, consumers will all move on to another identical good at a lower price, and that firm will sell nothing. Firms will also not want to lower the price of their good since they can sell as much as they want at the going market price.

Which of the following is NOT one of the reasons a firm might be expected to experience economies of scale? A Specialization of all inputs B Reducing issues with diminishing marginal product of labor C Firms using larger volume equipment D Improved equipment

Reducing issues with diminishing marginal product of labor

In the long-run, what will diminishing marginal returns be? Relevant if all inputs are changed B Relevant if one input is changed while the other input is held constant or reduced C Not be relevant, because all inputs can be changed D Apply if all resources are increased in portion to one another

Relevant if one input is changed while the other input is held constant or reduced

Assume an additional waiter can increase the number of customers served in a restaurant by 100 customers per day. The waiter will cost the restaurant $50 per day. On the other hand, a new microwave oven will speed the cooking process and allow each customer to be served more quickly. The oven will allow 200 more customers to be served with no additional labor. The oven can be rented for $75 per day. What should the restaurant do?

Rent a microwave, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker

Currently, the marginal product of labor is 45 units per week. The average product of labor at the current level of output is 32 units per week. If the employer hires one more worker, the marginal product of labor will be 47 units per week. The average product of labor will ______________. A Equal the marginal product of labor B Fall C Rise D Stay the same

Rise

Variable cost ______________ while fixed cost ______________ as output ______________ in the short run.

Rises, stays the same, increases

barrier to entry

Some factor that prevents firms from entering an industry when economic profits are being earned.

Assume the average Mexican factory worker has lower wages than the average U.S. factory worker and the workers have equal marginal products. Also suppose that both factories have access to the same technology. If for the first time, a firm is free to hire labor in either country, what is likely to happen? What is likely to happen to wage levels in the two countries?

Some firms will hire Mexican labor and reduce U.S. labor. As the demand for Mexican labor increases, wages will increase. As the demand for U.S. labor decreases, wages will decrease.

land

The actual land used, including raw materials from land, water, or air.

Total revenue

The amount a firm receives for its product at each level of output.

The marginal product of labor (MPL) can be defined as which of the following? A The change in output costs when another worker is hired B The change in output level as the result of hiring another worker C The change in the wage rate as the result of hiring another worker D The change in capital productivity when another worker is hired

The change in output level as the result of hiring another worker

marginal cost

The change in total cost resulting from an increase in production of one unit of output. It can be calculated by dividing the change in total cost by the change in total product.

Marginal cost:

The change in total costs that results from increasing total product by one unit.

Marginal product of capital (MPK)

The change in total output that results from the firm hiring one more unit of capital.

Marginal product of labor (MPL):

The change in total output that results from the firm hiring one more unit of labor.

marginal revenue

The change in total revenue resulting from the sale of one more unit

total fixed cost

The cost of all the inputs that are fixed. Total fixed cost is fixed because it does not vary as output changes. it is fixed in the sense that as output varies, part of total costs does not change.

implicit cost

The cost that a business bears by being in its business and not in another business. It is the profit that could be earned elsewhere. It is the opportunity cost.

explicit costs

The cost that a business pays by writing a check or paying cash.

Variable costs

The costs (prices multiplied by amounts of inputs) of the inputs that can be changed. In the long-run, all inputs are variable. These costs vary as output changes.

Why is there an upward-sloping marginal cost curve?

The firm experiences diminishing marginal product in the short run. With lower marginal product comes higher marginal costs.

Regarding input choices, how would a firm respond to an A The firm would use less capital. B The firm would use less labor. C The firm would use less labor and more capital. D The firm would use more labor and less capital.increase in the wage rate?

The firm would use less labor and more capital.

Regarding perfect competition, what does it mean when the goods sold by the firms in a market are homogeneous? A Firms can produce the same good with different inputs and different costs. B The good sold by one firm is a perfect substitute of the good sold by another firm in the same market. C The firms in the market are the same size. D The goods sold by one firm are complements of the goods sold by another firm in another market.

The good sold by one firm is a perfect substitute of the good sold by another firm in the same market.

Suppose two firms want to merge in order to save costs. Charter Communications and Time Warner Cable are recent examples in the cable TV and broadband internet industry. Also suppose that they will be able to lower costs of providing services by 30 percent. Should antitrust law stop the merger? Why or why not? Should Ford and BMW merge? Should CNN and Fox News?

The issues are the cost savings versus the increased market power that can be used by the resulting merged company. The analysis of the trade-offs is not easy to make. Clearly there are gains and increased technical efficiencies from this type of a merger. However, if the merger significantly decreases competition and makes an implicit or explicit cartel a much more likely outcome, allocative efficiency will suffer.

allocatively efficient

The levels of production of goods and services are such that a change in those levels will make consumers worse off, not better off.

law of diminishing marginal returns

The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.

If the marginal product of a machine is twice the marginal product of an additional worker and the cost of the machine is one-half the cost of that worker, what should a firm do about its current use of capital and labor? Explain why.

The marginal product per dollar spent on machines is greater than the marginal product per dollar spent on labor. Thus, the firm should reduce the labor and expand the amount of capital. A reduction of one worker will allow the firm to rent two machines. Because the marginal product of a machine is twice that of a worker, output (for the same cost) will increase by four times the output lost by reducing workers.

total revenue

The number of goods sold times the price at which they are sold

marginal analysis

The process of comparing the change in benefits with the change in costs resulting from an action

Long-run market supply:

The quantity supplied at each price, after firms are given time to vary all inputs and to enter and exit the industry.

A production function can best be described as which of the following?

The relationship between the quantity of inputs and quantity of outputs produced in a given amount of time explanation. The production function represents a relationship, not one particular combination of inputs and outputs ("a" represents a production possibilities frontier).

total cost .

The sum of total fixed cost and total variable cost.

Total product

The total amount of output produced.

total product

The total amount of output that can be produced in a given time period with specified amounts of inputs.

If a fixed cost does not change as output changes, why do you still have to pay it if you produce zero output?

There are some inputs that you must commit to just to get into the market. For example, you may need factory space. You will have to sign a lease or a loan agreement to get access to the space. The owner of the space or the bank that lends you the money does not care how much you produce. They must get paid every month no matter what. You may have to pay out of your own resources if you produce nothing.

economic profit

Total revenues minus all costs, including explicit and implicit costs. Economic profit equals accounting profit minus normal profit (the accounting profit foregone).

A firm's long-run total cost curve is ________. A Upward sloping B Downward sloping C Horizontal D Any of the above, depending on the industry

Upward sloping

For the next three questions, the following abbreviations are used. MPL = marginal product of labor. MPK = marginal product of capital. W = wage rate (the cost of a unit of labor). R = rental rate (the cost of a unit of capital). Assume a firm is operating in the long-run. At the current level of output, MPL = 30 and MPK = 50. Also assume that in this industry, W = 5 and R = 10. Keeping output the same, how can this firm lower production costs?' A Use more K and less L B Use more L and less K C The firm is already using the optimal cost-minimizing combination of inputs for this level of output.

Use more L and less K

Explain what will happen to economic efficiency when two firms agree to set prices and produce a mutually agreeable level of output.

When firms agree to set prices and produce a mutually agreeable level of output, economic efficiency will likely be reduced. We know this because firms wouldn't bother trying to agree on a price unless they were trying to increase it. They can only increase price by also agreeing to produce less.

factors of production

When producers create goods and services to earn revenue that generates their profits: they purchase, rent, or hire ______ what economists often describe the production process as using intermediate goods, or goods produced by other businesses, and resources or inputs in three specific categories. (land, labor, capital)

A monopolist will engage in price discrimination, if it can, in order to increase profits by doing which of the following?A By selling more of its goods B By reducing costs for some of its products C While continuing to produce the same amount D While increasing prices for all consumers and producing less

While continuing to produce the same amount

Does the law of diminishing marginal product hold in the long-run? Why or why not?

Yes, it still holds. We can still hold an input constant in the long-run, but we have the option to change them all. If we hold capital constant, we'll still see diminishing marginal returns to labor. But remember that in the long-run we can add more capital if we need to.

If accounting profits equal $10 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is ________. A $3 million B $7 million C $10 million D $13 million

a

Which of the following is a cause of diminishing marginal productivity?A In the long run, labor gets tired as more labor gets added to the production process. B In the short run, labor runs out of available capital as more labor gets added to the production process. C In the long run, capital depreciates as more capital gets added to the production process. D In the short run, capital gets more expensive as you add more capital to the production process.

b

Which of the following most likely represents a short-run business decision? A Jane is trying to decide whether to start a second franchise of her business. B Aaron hires two additional workers to help cover the holiday rush at his shop. C Xiang lists his delivery truck for sale in hopes of raising money to buy a new one. D Ellen applies for a loan to finance an expansion of her plumbing business

b

In the long-run, marginal cost will be ____________ average cost if the firm is experiencing economies of scale. A Below B Above C Equal to D None of the above. Marginal cost is a short-run concept.

below

What is similar and what is different between the automobile industry and restaurant industries?

both are industries that generate revenue, both make very different products and have several different competitions.

A natural monopolist will face which of the following? A The same costs a competitive industry faces B Ownership of all of the sources of a natural resource C Economies of scale D Prices that are higher than average costs, while other monopolists will have average costs that are higher than prices

c

Assume that instead of the cost of the three computer work stations and space being $5,000 per month, it is $10,000 per month. Match the number of workers to the correct marginal cost. A = $3,000, B = $3,000, C = $3,000 B A = $3,000, B = $1,500, C = $1,000 C A = $30.00, B = $27.27, C = $23.08 D A = $30.00, B = $13.64, C = $8.57

c

Marginal cost is the slope of _______. A The average cost curve B The average product curve C The total cost curve D The marginal product curve

c

The Coca-Cola Company is the only producer of Coca-Cola. Is it considered a monopoly?A Yes, it is the only firm with the recipe for a real Coca-Cola. B Yes, because Coca-Cola has no close substitutes. C No, because Coca-Cola has many close substitutes.

c

At 1,000 units of output the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. If labor is the only variable input and the weekly wage is $1,600, how much labor is being used produce 1,000 units of output? A 5.0 B 17.8 C 16.0 D 10.0

d Total variable cost = variable input its price (laborwage)

The monopoly and perfectly competitive firm are allocatively efficient.

false

perfectly competitive market

has many buyers and sellers all producing the same product. Consumers and producers are aware of quality and prices. Firms can easily enter and exit the industry.

Suppose that Amazon wants to increase its market share in the streaming video market by merging with Hulu, claiming that this will expand the services available to customers and lower the costs of providing these services. Do you think this merger is likely to be challenged by the Federal Trade Commission? What methods might the FTC use to decide?

he Federal Trade Commission uses the concentration index approach; currently, they use the sum of squares of firms' market shares before and after the merger and how much the merger would increase the market concentrations and thus lower competition. If the merger substantially increases market concentrations, it is likely to be challenged. As of May 2016, the streaming video market has three major players: Netflix with 53% share, Amazon with 25% and Hulu with 13%. To calculate the concentration index, you need the sum of the squares of market shares, (53)2+(25)2+ (13)2 = 3603, which is already greater than 2500 and therefore already considered a highly concentrated market. After the merger, the market would become even more concentrated and the index would increase to (53)2+(38)2= 4253, more than 200 points. Therefore, it is very likely to be challenged. Sources: Department of Justice and Federal Trade Commission Horizontal Merger Guidelines: https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf Roger Cheng, "Netflix leads a streaming video market that's close to peaking," cnet.com, May 25, 2016.

How will an increase in the wage a business pays affect total product, average product, marginal product, total cost, average cost, and marginal cost in the short run?

if a business pays more they will produce less on average and in total which will effect the marginal product and make prices higher in the short run

In your own words, explain why a firm should produce where marginal revenue is equal to marginal cost (or as close to equal as possible).

if marginal revenue is greater than marginal cost, then profits increase as quantity increases. If marginal revenue is less than marginal cost, then profits are decreasing as quantity increases. The point where marginal revenue is equal to marginal cost occurs when profits are maximized.

How will an improvement in technology change total product, average product, marginal product, total cost, average cost, and marginal cost in the short run?

increase all the costs in the short run as the improved tech is demanded

economies of scale

long run average total cost decreases as the quantity of output increases

diseconomies of scale

long run average total cost increases as the quantity of output increases

constant returns to scale

long-run average total cost remains constant as the quantity of output increases

Profit maximization. We assume that competitive firms have the maximization of profits as their only goal, or at least that they act as that is their only goal.

maximization of profits

average product

the total product divided by the number of units of a particular inputs used

average cost

total cost divided by the total product

average revenue

total revenue divided by the quantity sold

The total cost of obtaining the inputs.

total variable cost where the cost is the variable because the cost changes as we expand production by adding more of the variable input.

average variable cost

total variable costs divided by total output. Same as average total cost or average cost in the long run when all cost are variable

How will an increase in the rent a business pays affect total product, average product, marginal product, total cost, average cost, and marginal cost in the short run?

when rent increases product decreases along w marginal product costs and other similar things in the short run

In the long run, the monopolist ______________ (will/will not) produce a quantity where average cost is at a minimum, whereas the perfectly competitive firm ______________ (will/will not) produce that quantity.

will not, will

Will a change in fixed costs change average cost?

yes

Will a change in fixed costs change total fixed cost?

yes

Is the demand curve facing one of the firms in a cartel more elastic or less elastic than market demand? Why?

​Demand facing a single firm is more elastic. This is because a small decrease in price will not only attract more buyers (movement along the market demand curve) but it will also attract buyers from the other members of the cartel who are charging a higher price.

Is marginal revenue facing a single firm in the cartel different than the marginal revenue curve facing the whole market? Which is higher and why?

​The marginal revenue for the individual firm include the marginal revenue for the entire industry plus some additional revenue that is take away from the other existing firms.

Will the monopolistically competitive firm tend to have a more elastic or less elastic demand than a monopoly? Explain why.

​The monopolistically competitive firm will have a more elastic demand than a monopoly because there will likely be more close substitutes. A monopoly has fewer substitutes and no close substitutes.

What is the rationale to use in setting price, if the firms in the entire industry are acting together?

​We would use the same rationale as in the case of monopoly. We would maximize the profit for one firm within any industry structure. For firms operating in oligopoly industry structure, setting marginal revenue equal to marginal cost will achieve that goal of maximizing profits for the industry.

The production of 75 sofas per week requires 15 workers. The average product of each worker is ______________ sofas per week.

5

Marcus has four employees. The four employees produce 55 floral arrangements in a day. Marcus hires a fifth employee. The five employees produce 60 floral arrangements in a day. The fifth employee's marginal product is

5 floral arrangements in a day (60-55 = 5).

At 2,000 units of output, the variable cost of production is $12,500 per week. Total cost of producing 2,000 units per week is $45,500. The fixed cost of producing 2,000 units of output per week is equal to ______.

$33,000

Using the information from the table above, if the monthly wage of an office chair factory worker is $2,160, what is the marginal cost of increasing output from 190 office chairs per month to 235 office chairs per month?

$48.00

Alicia is currently spending $6,000 per week on total variable costs to produce 500 hats. To produce 505 hats per week she would have to spend $6,100 per week. The marginal cost per hat is ______. $6,100 B $100 C $20 D $5

20

Santa Claus's only variable input is labor. The wage he must pay is 200 candy canes per week. What is Santa's total weekly variable cost if he hires 200 elves?

40,000 candy canes

What do you think would happen in a commercial neighborhood near your home if a restaurant in that neighborhood were making a great deal of profit (select all that apply)?

A In-and-Out burger will open a new franchise. B Domino's Pizza will move to this neighborhood from a rundown area of the town. C Chipotle will open a new store next door.

Antitrust law:

Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices.

antitrust law

Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices.

Total fixed costs:

The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes

marginal product

The increase in output from using one more unit of an input while all other inputs are constant (ΔTP/ΔL).

total cost

Total cost divided by total output

The slope of a firm's production function will ______ as the amount of a variable input used increases if the input experiences diminishing marginal productivity. A Not change B Be indeterminate depending on the amount of the variable input used C Increase D Decrease

decrease

Why do new firms enter?

in order to earn economic profits like other firms and industries

Mergers can sometimes be socially beneficial if they do which of the following? A Reduce competition in the market B Enhance the quality of the products C Increase costs D Increase market pricing power of oligopolies

nhance the quality of the products