ECON 202 - Exam 2

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- Change in demand: a shift of the curve - Caused by: a change in anything that affects demand other than wages (i.e, the price of labor) Increase in demand: curve shifts right Decrease in demand: curve shifts left

Demand

- Sole Proprietorship: 72% - Corporations: 18% - Partnerships: 10% Nearly ¾ of firms are sole proprietorships, and just one in six is a corporation

Number of Firms

A. economies of scale

A downward-sloping portion of a long-run average total cost curve is the result of A. economies of scale B. diseconomies of scale C. increasing returns D. the existence of fixed resources

- Higher revenue: because of the higher P - Lower revenue: you sell fewer units (lower Q)

A price increase has two effects on revenue:

1. Proprietorship 2. Partnerships 3. Corporations

3 Types of Business Firms

S Decrease, P Increase, Q Decrease D Decrease, P Decrease, Q Decrease - Quantity decreases, but ? for price

4. Decrease S, Decrease D

Partnership

> than 1 owner

Consumers will maximize utility by ensuring that the last dollar spent on each commodity yields an equal degree of marginal utility

Consumer Equilibrium

- Corporations: 82% - Partnership: 14% - Sole Proprietorship: 4%

Revenue

(PB - PE) x QT

Revenue from buyers

1. Contracting 2. Team production

There are two ways to organize productive activity:

A. quantity demanded would exceed quantity supplied

With a price floor below the equilibrium price, A. quantity demanded would exceed quantity supplied B. quantity supplied would exceed quantity demanded C. the market would be in equilibrium D. the equilibrium price would be expected to rise over time

Total Revenue

the amount a firm receives from the sale of its output TR = P×Q

S Increase, P Decrease, Q Increase D Decrease, P Decrease, Q Decrease - Price increases, but ? for quantity

2. Increase S, Decrease D

- The larger the share of the consumer's budget, the higher the elasticity - Ex. Lighters and Insurance

2. Products share of the consumers total budget

S Decrease, P Increase, Q Decrease D Increase, P Increase, Q Increase - Price increases, but ? for quantity

3. Decrease S, Increase D

- Known as the Second Law of Demand

3. When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run

- If cost per unit varies according to the size of the facility, then a Long Run Average Total Cost curve(LRATC) can be mapped out as the surface of all the minimum points possible at all the possible degrees of scale. - LRATC also known as the planning curve

A Typical LRATC Curve

Law of Diminishing Returns - Example: Think about fertilizer (variable input) and a piece of farm land (fixed input).

As more and more units of a variable resource are applied to a fixed amount of other resources, output will eventually increase by smaller and smaller amounts

B. ATC must be at its maximum

As output is expanded, if MC is more than ATC, A. ATC must be at its minimum B. ATC must be at its maximum C. ATC must be increasing D. the firm must be earning economic profit

Law of Diminishing Marginal Utility

As the consumption of a product increases, the marginal utility derived from additional consumption will eventually decline

AFC = TFC / Q - Average fixed costs always declines with output, holding other things constant

Average Fixed Cost Equation

AP = (total product)/(units of labor)

Average Product Equation

ATR = tax liability / taxable income

Average Tax Rate Equation

ATC = TC / Q ATC = AFC + AVC

Average Total Cost Equation

AVC = TVC / Q

Average Variable Cost Equation

Regressive tax

Average tax rate falls with income

Proportional tax

Average tax rate is the same at all income levels

Progressive tax

Average tax rate rises with income

This can occur because of, for instance: - mass production - Labor and managerial specialization - improvements in production as a result of experience

Reductions in per unit costs as output expands:

- Mountains = bomb - No mountains = rent control

Rent Control or Bombing?

Explicit Costs

Result when a monetary payment is made

(PE - PS) x QT

Revenue from sellers

1. Price of resources (P increase, ATC curve increases (shifts upward)) 2. Taxes (T increase, ATC curve increases (shifts upward)) 3. Regulations (R increase, ATC curve increases (shifts upward)) 4. Technology (T increase, ATC curve decreases (shifts downward))

Shifters of the Cost Curves

The Long Run Average Total Cost Curve (LRATC) -Outlines the possibilities available in the planning stage

Shows the minimum average cost of producing each output level when the firm is free to choose among all possible plant sizes

- Owners will attempt to control shirking through both incentives and monitoring. - These sort of problems known as principal-agents problems.

Shrinking

Sole Proprietorship

Single owner

Those who earn a higher wage will face a higher time cost *higher opportunity cost of time*

The cost of time is different for different individuals:

B. other goods that might have been produced with the same resources

The costs of a firm indicate the desire of consumers for A. the product produced by the firm B. other goods that might have been produced with the same resources C. goods that can be easily substituted for the good produced by the firm D. goods that are complementary with the good produced by the firm

Substitution effect

The good has become cheaper relative to other goods

Principal-agent problem

The incentive problem that arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest.

Deadweight loss

The loss to society that results from the loss of gains to trades that do not occur because a tax was imposed

Total Cost

The market value of the inputs a firm uses in production

Marginal Benefit - Marginal Benefit falls as you move down the demand curve

The maximum price a consumer will be willing to pay for an additional unit of the product (the height of the demand curve)

Average tax rate (ATR)

The percentage of income paid in taxes

Tax Incidence - It does not depend on whom the tax is imposed - Statutory incidence vs. actual incidence

The way the burden of a tax is distributed among economic units

PED = (106-84) /(106+84) x 100% = 11.57% (4-6) / (4+6) x 100% = -20% 11.57% / -20% = 0.58 0.58 < 1, so PED is inelastic

Use the following information to calculate the price elasticity of demand for hand grenades in bourbon street in a given day: ~ if P = $4, Qd = 106 ~ if P = $6, Qd = 84 - Use the midpoint method to calculate the price elasticity of demand between these points. - Is PED elastic, inelastic, or unitary elastic?

Contracting

Using outside producers for specific tasks

- Cannot be directly measured - As people consumed more of an item their total utility would change

Utility

- If the tax is legally imposed on sellers, shift the supply curve - If the tax is legally imposed on buyers, shift the demand curve - You'll reach the same conclusion either way

Ways to analyze:

The short version: Diminishing marginal returns Need larger and larger additions of variable factors to expand out by one unit.

We then observe MC begin to increase. Why

Make a profit

What a firm's main purpose?

4 Scenarios: 1. Increase S, Increase D 2. Increase S, Decrease D 3. Decrease S, Increase D 4. Decrease S, Decrease D

What happens if supply and demand both change at the same time?

C. Equilibrium price would become the market price

What would happen in a market where a price ceiling was set above equilibrium price? A. A surplus would occur B. The shortage would become larger C. Equilibrium price would become the market price

C. non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good

When a shortage of a good is present due to a price ceiling, A. the amount supplied will be greater than the amount demanded B. the quality of the good will generally improve C. non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good D. the demand for the product will increase and, thereby, eliminate the shortage

A. Go to the party

Your friend announces that there is going to be a mega blow-out party this Saturday night, which is the same night as the Lady Gaga concert. You really want to go to the party more than the concert, but you have already spent money on the concert tickets and its too late to sell them. What should you do? A. Go to the party B. Go to the concert C. Sit at home and watch Mega-Shark on the Sci-Fi channel while sadly lamenting your misfortune of both events being on the same night

- Fixed costs will remain unchanged as output rises or falls in the short run - Ex. Insurance premiums, property taxes, etc.

Fixed Costs

1. Limited income necessitates choice 2. Consumers make decisions purposefully 3. One good can be substituted for another 4. Consumers must make decisions without perfect information 5. The law of diminishing marginal utility applies to consumption

Fundamentals of Consumer Choice

$T x QT

Government Revenue

Income effect

It is as if your real income has increased.

- Firms demand labor - Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people

Labor Demand

- Workers supply labor - Labor supply curve is upward sloping because as wage increases, people will want to work more.

Labor Supply

Corporations

Larger firms with stock options

- There is a close relationship between the demand for products and the demand for resources used to make those products

Linking the Markets

AVC (ATC) decreases

MC < AVC (ATC) →

AVC (ATC) increases

MC > AVC (ATC) →

rises

MC curve may decrease at first, but then

MC = change in TC / change in Q

Marginal Cost Equation

MP = (change in total product)/(change in labor input)

Marginal Product Equation

MTR = change in tax liability / change in taxable income

Marginal Tax Rate Equation

Price Elasticity of Demand

Measures how responsive consumers are to a change in the products price

Price elasticity of supply

Measures how responsive suppliers are to a change in price

Income Elasticity

Measures the responsiveness of the demand for a good to a change in income

PED= (Q0-Q1)/(Q0+Q1) x 100% (% change in quantity demanded) /(P0-P1)/(P0+P1) x 100% (% change in price) Q0 = Original Q1 = New P0 = Original P1 = New

Midpoint Equation (use when not given percent of change in quantity and price for the price elasticity of demand (E)

- Income elasticity is greater than 1

Normal Goods: Luxury

- Income elasticity is between 0 and 1

Normal Goods: Necessity

1. Making something illegal does not eliminate demand 2. If demand is strong and gains from trade are to be had, market will develop and exchange will occur 3. High price to account for risk (operating outside the legal structure). 4. Economic analysis shows that these markets are characterized by higher incidence of: a. Defective products (uncertain property rights, lower levels of competition) b. Higher profit rates (risk) c. Higher Violence (lack of legal means)

Note on black markets

Economies of Scale - Reductions in per unit costs as output expands

Occurs when the firm's per-unit costs decrease as output increases (Q↑ → LRATC↓)

Diseconomies of Scale - Increases in per unit costs as output expands

Occurs when the firm's per-unit costs increase as output increases (Q↑ → LRATC↑)

Constant Economies of Scale

Occurs when the firms per-unit costs do not change as output changes

- Change in quantity demanded: A movement along the curve - Caused by: a change in wages Increase in quantity demanded: movement down the curve (to the right) Decrease in quantity demanded: movement up the curve (to the left)

Quantity Demanded

- Change in quantity supplied: a movement along the curve - Caused by a change in wages Increase in quantity supplied: Movement up the curve (to the right) Decrease in quantity supplied: Movement down the curve (to the left)

Quantity Supplied

Flatter

Elastic Demand: Flatter or Steeper

= P increases, Q decreases

Elastic: TR decreases

= P decreases, Q increases

Elastic: TR increases

- Measure of the responsiveness of quantity demanded or quantity supplied ~ To a change in one of its determinants

Elasticity

- The quantity effect dominates - P and TR move in opposite directions

Elasticity and Total Revenue: Elastic

- The price effect dominates - P and TR move in the same direction

Elasticity and Total Revenue: Inelastic

- Demand is inelastic

Elasticity of Demand: Ed < 1

- Fixed (don't vary with quantity) - Variable (vary with quantity) *We can further break these down into total costs and "average" (or per-unit) costs*

2 Categories of Cost

Profit = Total revenue - Total cost *We assume that the firm's goal is to maximize profit*

Profit Equation

- Corporations: 67% - Partnership: 22% - Sole Proprietorship: 11%

Profits

S Increase, P Decrease, Q IncreaseD Increase, P Increase, Q Increase - Quantity increases, but ? for price

1. Increase S, Increase D

- Good Substitutes = Higher Elasticity - The more narrowly defined the product is the more elastic it is (because it has more good substitutes)

1. The most important determinant of the price elasticity of demand is the availability of substitutes

The Laffer Curve

A curve illustrating the relationship between the tax rate and tax revenue

Price ceiling

A legally established maximum price sellers can charge for a good or resource

Price floor

A legally established minimum price buyers must pay for a good or resource

Long Run

A time period long enough to allow the firm to vary all of its factors of production.

Short Run

A time period so short that a firm is unable to vary some of its factors of production; a period of time in which at least one input is fixed

output

AFC falls with

U-shaped

ATC is

LARGE

AVC is a LARGE part of ATC when output is

small

AVC is a small part of ATC when output is

Accounting Profit = Total Revenue - Explicit Costs

Accounting Profit Equations

- Limited personal liability - Greater ability to raise funds *But since larger firms tend to be corporations, most economic activity takes place through them*

Advantages: Corporation

- Ability to share work - Ability to share risks

Advantages: Partnership

- ·Control by owner ·- No layers of management

Advantages: Sole Proprietorship

B. an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed

An increase in the number of students graduating with a major in engineering would result in A. a decrease in the supply of engineers that would increase the wage of engineers and decrease the number employed. B. an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed. C. a decrease in the demand for engineers that would decrease the wage of engineers and decrease the number employed. D. an increase in the demand for engineers that would increase the wage of engineers and increase the number employed

- The minimum wage is an example of a price floor. - Raising minimum wage increases excess labor supply (unemployment).

Application: Minimum Wage

- Because of shortage ~ Sellers must ration the goods among buyers

Application: Rent Control

D. a reduction in the quality traded

Both price floors and price ceilings lead to A. shortage B. surpluses C. reductions in quality D. a reduction in the quality traded

PED = (8-12) / (8+12) x 100% = -20% ($250-$200) / ($250+$200) = 11.11% -20% / 11.11% = -1.80, take the absolute value = 1.80 1.80 > 1, so it is elastic

Calculating PED: B (8, $250) and A (12, $200)

- Increase in labor demand: labor demand shifts right - Decrease in labor demand: labor demand curve shifts left

Changes in Labor Demand

- Increase in labor supply: labor supply curve shifts right - Decrease in labor supply: labor supply curve shifts left

Changes in Labor Supply

Inelastic Demand - Small change in QD

Changes in quantity are not sensitive to changes in price

Elastic Demand - Large change in QD

Changes in quantity are sensitive to changes in price

1. Black markets 2. A decline in the supply of future rental housing 3. A decline in quality of rental housing 4. Non-price methods of rationing (discrimination) 5. Inefficient housing match-ups (perhaps unfair as well)

Consequences of Rent Control

MUA / PA = MUB / PB

Consumer Equilibrium Equation

- Short run: ~ Some inputs are fixed (e.g., factories, land) ~ The costs of these inputs are FC - Long run: ~ All inputs are variable (including plant size) ~ All costs are variable in the long run. - In the long run ~ ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)

Costs in the Short Run & Long Run

Sunk Costs - Should be ignored - Go with the highest utility

Costs that have already been incurred as a result of past decisions

- There is not a unique best business structure. - Corporations benefit from limited liability but are expensive to organize. - Also, their profits may be taxed twice: once as corporate profits, and again when the profits are disbursed to investors.

Differences among Business Organizations

- Costly to organize - Possible double taxation of income

Disadvantages: Corporation

- Unlimited personal liability - Limited ability to raise funds

Disadvantages: Partnership

- Unlimited personal liability - Limited ability to raise funds

Disadvantages: Sole Proprietorship

Excess Burden of Taxation

Deadweight loss is also known as...

- Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic. ~ That is, goods for which either supply or demand are not sensitive to price changes

Determinants of Deadweight Loss

- More elastic supply curve ~ Larger deadweight loss - More elastic demand curve ~ Larger deadweight loss

Determinants of Deadweight Loss: Price elasticities of supply and demand

1. The most important determinant of the price elasticity of demand is the availability of substitutes 2. Products share of the consumers total budget 3. When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run

Determinants of Price Elasticity of Demand

Economic Profit = Total Revenue - Explicit Costs - Implicit Costs

Economic Profit Equation

- Demand tells firms what to produce; indicates the intensity of consumers' desires for an item. - Conversely, production of a good requires resources. The opportunity cost of these resources represents the desire of consumers for other goods that might have been produced instead.

Economic Role of Costs

only when the rate of return is above the normal market rate of return (the opportunity cost of capital)

Economic profit occurs

long run concepts (where all factors are variable)

Economies and diseconomies of scale are

Utility

Economists refer to the enjoyment or satisfaction that people obtain from consuming goods and services

- The effects are the same (no change in total revenue)

Elasticity and Total Revenue: Unitary Elastic

- Demand is perfectly inelastic

Elasticity of Demand: Ed = 0

- Demand is unit elastic

Elasticity of Demand: Ed = 1

- Demand is perfectly elastic

Elasticity of Demand: Ed = ∞

- Demand is elastic

Elasticity of Demand: Ed > 1

C. 2.5, making cheezy poofs a luxury for Cartman

Eric Cartman recently received a 10 percent increase in his income. His purchase and consumption of the snack food "Cheezy Poofs" has since increased by 25 percent. Eric Cartman's income elasticity for Cheezy poofs is A. -2.5, making cheezy poofs an inferior good for Cartman B. 2.5, making cheezy poofs a necessity for Cartman C. 2.5, making cheezy poofs a luxury for Cartman D. 0.40, making cheezy poofs a necessity for Cartman

Governments can sometimes improve market outcomes - Want to use price controls ~ Because of unfair market outcome ~ Aimed at helping the poor - Often hurt those they are trying to help - Other ways of helping those in need ~ Rent subsidies ~Wage subsidies (earned income tax credit)

Evaluating Price Controls

Markets are usually a good way to organize economic activity - Economists usually oppose price ceilings and price floors - Prices are not the outcome of some haphazard process - Prices have the crucial job of balancing supply and demand - Coordinating economic activity

Evaluating Price Controls

1. Competition among firms for investment funds & customers 2. Compensation and management incentives 3. The threat of corporate takeover

Factors that promote cost efficiency and customer service but limit shirking by corporate managers include:

C. is $4,000 on automobile buyers and $1,000 on sellers

If a $5,000 tax is placed legally (statutorily) on the sellers of new automobiles and as a result the price of automobiles to consumers rises by $4,000, then the actual burden of the tax A. falls completely on automobile buyers B. falls completely on automobile sellers C. is $4,000 on automobile buyers and $1,000 on sellers D. is $1,000 on automobile buyers and $4,000 on sellers

D. 0.5, inelastic 2/-4 = -.50, take the absolute value = .50

If the price of alcohol on FSU's campus decreases by 4 percent and causes alcohol consumption to increase by 2 percent, the price elasticity of demand is ____, indicating that the demand for alcohol among FSU students is A. 2, elastic B. 2, inelastic C. 0.5, elastic D. 0.5, inelastic

A. an annual business license fee paid to the local government

If you were operating a fast-food restaurant, which of the following would represent a fixed cost of production in the short run? A. an annual business license fee paid to the local government B. wages paid to workers C. the cost of electricity to light the restaurant D. the cost of paper supplies (napkins, bags, etc.)

- A tax on the sellers of a product will cause the supply curve to shift up by the amount of the tax. - A tax on the consumers of a product will cause the demand curve to shift down by the amount of the tax

Impact of a Tax

1. Raises the price that buyers pay 2. Reduces the amount sellers receive 3. Reduces the quantity sold 4. Increases government revenue 5. Creates deadweight loss

Impact of a Tax: Regardless, a tax

Normal Profit Rate *Zero economic profit does NOT mean the business is failing*

Is zero economic profit, yielding just the competitive rate of return on the capital and labor of the owners

IE = %∆QD / %∆I *SIGN DOES MATTER*

Income Elasticity Equation

- Negative income elasticity

Income elasticity determines the type of good: Inferior Goods

- Positive income elasticity

Income elasticity determines the type of good: Normal Goods

This can occur because of: - Control and coordination problems - Communication problems - Worker alienation - Shirking

Increases in per unit costs as output expands:

short run concepts (where at least one factor of production is fixed)

Increasing and diminishing returns are

Residual Claimants - Residual claim provides a strong incentive to keep costs of production low

Individuals who personally receive the excess of revenues over costs

Steeper

Inelastic Demand: Flatter or Steeper

= Price decreases, Q increases

Inelastic: TR decreases

= Price increases, Q decreases

Inelastic: TR increases

Implicit Costs - Example: ~ time spent by owner running the firm ~ the foregone normal rate of return on the owner's financial investment (opportunity cost of equity capital)

Involve the opportunity costs associated with the firm's use of resources that it owns

When the price of a good decreases: 1. Substitution Effect 2. Income Effect

People will buy more (less) of a good as the price of the good decreases (increases) for two reasons:

- Price elasticity is NOT the slope of the demand curve - A straight-line demand curve will have constant slope but a different elasticity at every point

Price Elasticity of Demand (Key Point)

- Use percentages ~ Unit free measure ~ Compare elasticities across products - Always negative, so we use the absolute value (ignore the negative sign) ~ Easier to compare elasticities

Price Elasticity of Demand Equation

PED = %∆QD / %∆P *Always negative, so we use the absolute value (ignore the negative sign)*

Price Elasticity of Demand Equation

-Similar to the price elasticity of demand, the price elasticity of supply will be greater in the long run. (The more time passes, the flatter the curve will be.)

Price Elasticity of Supply

PES = %∆QS / %∆P *SIGN IS ALWAYS POSITIVE* - Direct relationship between supply and price

Price Elasticity of Supply Equation

- A price ceiling below market equilibrium price creates a shortage - A price ceiling above market equilibrium price does nothing

Price ceiling

- A price floor above equilibrium price creates a surplus - A price floor below equilibrium price does nothing

Price floor

- Change in supply: A shift of the curve - Caused by a change in anything that affects supply other than wages (i.e, the price of labor) Increase in supply: curve shifts right Decrease in supply: curve shifts left

Supply

C. Less than 1

Suppose you are managing a clothing store and you plan to increase revenues by increasing the price of the clothing that you sell. What must the absolute value of the price elasticity of demand for the clothing in your store be in order for your plan to make sense? A. Greater than 1 B. Equal to 1 C. Less than 1 D. Perfectly elastic

- Does depend on elasticity - The burden of the tax will fall on those who are relatively inelastic. - Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic.

Tax Incidence

Tax Burden

Tax Incidence is also known as

- Government uses taxes ~ To raise revenue for public projects (roads, schools, and national defense) *We will only consider per-unit taxes*

Taxes

Marginal Costs (MC) - Typically, MC will decline initially, reach a minimum, and then rise

The change in total costs required to produce an additional unit of output.

- Price for labor is called the wage (W) - Quantity of labor is called employment (E) - Works just like the market for goods, only with a different name for price (wage) and quantity (employment)

The Labor Market

- Higher tax rates will not always lead to more tax revenue!! - Alternatively, lower tax rates will not always lead to less tax revenue!!

The Laffer Curve

- Sum the individual demand curves horizontally - To find the total quantity demanded at any price, we add the individual quantities

The Market Demand Curve

1. Progressive tax 2. Regressive tax 3. Proportional tax Note: These deals with percentage paid in taxes! Actual dollar amounts paid might still be higher for people with higher income.

The Tax System: 3 possibilities

Marginal Tax Rate (MTR) - Are important personal decision making

The additional tax liability a person faces divided by his or her additional taxable income

Marginal Utility - Remember: in economics, "marginal" means "additional"

The amount by which total utility would change when consuming an extra unit of a good or service

Marginal Utility

The benefit derived from consuming an additional unit of the good

B. at small output rates, AFC will be high while at large output rates MC will be high as the result of diminishing returns

The short run average total cost (ATC) curve of a firm will tend to be U-shaped because A. larger firms always have lower per unit costs than smaller firms B. at small output rates, AFC will be high while at large output rates MC will be high as the result of diminishing returns C. diminishing returns will be present when output is small while high AFC will push per unit cost to high levels when output is large D. increasing marginal returns will be present at both small and large output rates

Total Fixed Costs (TFC)

The sum of the costs that do not vary with output

Total Variable Costs (TVC) - Ex. wages, raw materials

The sum of those costs that change with output

A. 5 percent and quantity supplied rises by 7 percent

The supply of product X is elastic if the price of X rises by: A. 5 percent and quantity supplied rises by 7 percent B. 8 percent and quantity supplied rises by 8 percent C. 10 percent and quantity supplied remains the same D. 7 percent and quantity supplied rises by 5 percent

one only produces if the additional revenue from one more unit is greater than the marginal cost of that unit

To increase profits:

Total Cost = Explicit Costs + Implicit Costs

Total Cost Equation

Average Total Costs (ATC)

Total Cost divided by the number of units produced

TC = TFC + TVC

Total Costs Equation

Average Fixed Costs (AFC)

Total Fixed Costs divided by the number of units produced

TR = P×Q

Total Revenue Equation

Total Revenue = Price x Quantity

Total Revenue Equation

Total Product

Total output of a good associated with different levels of a variable input

Average Variable Costs (AVC)

Total variable costs divided by the number of units produced

C. an increase in price will increase total revenue

When the percentage change in price is greater than the resulting percentage change in quantity demanded: A. a decrease in price will increase total revenue B. demand may be either elastic or inelastic C. an increase in price will increase total revenue D. demand is elastic

Team production

Where employees work together under the supervision of the owner (or owner's representative)

C. the foregone salary the owner would have earned if working for someone else instead of running the company

Which of the following is most likely to be an implicit cost of production? A. the wages the owner pays to her employees B. the property taxes on a building owned by the firm C. the foregone salary the owner would have earned if working for someone else instead of running the company D. the interest paid on outstanding loans of the business

A. Marginal cost is less than average total cost

Which of the following must be true if average total costs are declining? A. Marginal cost is less than average total cost B. Marginal cost is less than average variable cost C. Marginal cost is greater than average total cost D. Marginal cost equals average total cost

1. We have increasing returns to start with 2. More efficient production (learning by doing for example)

Why do we see this U-shape? Let's focus on marginal cost. At the beginning we see decreasing MC because of

Shirking - Examples: Long coffee breaks, lunches, water breaks, etc.

Working at less than the expected rate of productivity, which reduces output


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