Econ EX1

Input substitution opportunities and the shape of isoquants

if the firm increase one input significantly, it will only be able to reduce the other one by a small amount, means there's almost no substitution between labor and machine. (left graph)

A competitive firm maximizes profit by choosing the quantity at which average total cost is at its minimum. marginal cost equals the price. average total cost equals the price. marginal cost equals average total cost.

marginal cost = price

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve. average total, marginal average variable, marginal marginal, average total marginal, average variabl

marginal, average variable

Backward Bending Labor Supply Curve

1. The substitution effect states that a higher wage makes work more attractive than leisure. Therefore, in response to higher wages, supply increases because work gives greater remuneration. 2. The income effect states that a higher wage means workers can achieve a target income by working fewer hours. Therefore, if wages increase, it becomes easier to get enough income through working fewer hours.

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run? down in the short run, no change in the long run up in the short run, no change in the long run no change in the short run, down in the long run no change in the short run, up in the long run

no change in the short run, down in the long run A monthly tax is an example of a fixed cost, because it does not change with the quantity of output produced. A firm chooses to shut down if the price of the good is less than the average variable cost of production, which does not include fixed costs, so there is no change in the number of pretzels consumed in the short run. In the long run, if the price is less than the average total cost (which includes fixed costs), a firm chooses to exit the market. Because the fixed cost increase will drive some firms' average total costs higher than the price, this will cause firms to exit (and the number of pretzels consumed to go down) in the long run. See Sections: The Firm's Short-Run Decision to Shut Down; and The Firm's Long-Run Decision to Exit or Enter a Market.