Exam 3 Economics
Long-Run Supply Curve of Lamps. Suppose each lamp manufacturer produces 10 lamps.
industry output --> #of firms X 10 lamps Avg cost per lamp -->
Minimum efficient scale is the level of output at which:
all economies of scale have been exhausted
According to the graph, what is the value of total fixed cost for this perfectly competitive firm?
$2,400
According to the table, what is the average total cost of producing 550 pizzas?
$5.00
Which of the following is not a policy the government uses to intervene in markets dominated by a single firm?
rent prohibition
To maximize profit, the firm chooses the quantity of output
where the marginal-revenue curve equals the marginal-cost curve.
In the short run, the firm should:
Operate if price > average variable cost.
Which point on this graph corresponds to a natural monopoly serving this market and breaking even?
Point A
Which of these is an example of a product with network externalities?
Social networks
Which of the following rights is given to the holder of a patent?
The exclusive right to a new product
The monopolist produces an output that is __________ the perfectly competitive industry would produce.
less than
The monopolist decision process involves a three-step process:
1. Finding the quantity at which marginal revenue equals marginal cost. 2. Using the demand curve to find the price associated with the monopolist's chosen quantity. 3. Computing the profit per unit sold as the price minus average total cost , and the total profit as the profit per unit times the number of units sold.
According to the graph, which level of output represents the minimum efficient scale in bookselling?
20,000 books
The average cost for providing off-street parking is $30 per space per day, and as a monopolist you could charge $40 per space per day for 200 spaces. The maximum amount that you are willing to pay for a monopoly is 2000
40 -30= 10 10 x200spaces
According to the graph, which level of output maximizes profit?
8 shirts per minute
A perfectly competitive industry has 125 identical firms. At a price of $6, the typical firm supplies 8 units of output, so the market quantity supplied is units of output.
8 x 125
Your firm has a total revenue of $300, a total cost of $700, and a variable cost of $600. You should shut down because variable cost exceeds total revenue .
A firm that is losing money should continue to operate in the short run if the market price exceeds average variable cost .
Maximizing the Profit Margin? According to the marginal principle, the firm should choose the quantity of output at which price equals marginal cost. A tempting alternative is to maximize the firm's profit margin, defined as the difference between price and short-run average total cost. Using this approach, which of the following would best describe the firm's short-run supply curve? Assume the firm will shut down rather than operate at a loss.
A vertical line at the quantity that minimizes average cost for prices above minimum average cost.
According to the data in the table, what level of output maximizes profit? 15,000 cups per month
According to the graph economic efficiency is achieved at what level of output? 8 units of output
a). total revenue= 2000,2000,4000 total cost= 200, 200, 400 profit= 1800, 1800, 3600
B). quantity= 95, 120, 215 total revenue = 2090, 2160, 4250 total cost= 190, 240, 430 profit =1900, 1920, 3820 C). increase
Expand If Profit Margin Is Positive? Consider a firm that uses the following rule to decide how much output to produce: If the profit margin (price minus short-run average total cost) is positive, the firm will produce more output. Compared to a profit-maximizing firm, the firm will
produce more output and earn lower economic profit.
The perfectly competitive firm represented in the graph on the right is experiencing a __________.
profit in the short run
In some cases, a patent is socially inefficient because it
prolongs a monopoly
In some cases, a patent is socially beneficial because it
provides a valuable product that owuld not otherwise be developed
The opportunity cost of driving for Uber or Lyft includes the
salary and fringe benefits from a regular job.
A hurricane increases the demand for ice, shifting the demand curve to the right. In the short run, the supply curve is relatively
steep; in the long run, the supply curve is horizontal.
Examples of increasing-cost industries include:
sugar and apartments.
If senior citizen consumers are price elastic, then a senior discount offered at a restaurant will;
increase the firm's profits.
As the price of shipping services increases, the quantity supplied
increases as firms deploy less efficient ships and as each ship travels faster.
According to the principle of diminishing returns, as one input increases while the other inputs are held fixed, output
increases at a decreasing rate which causes the marginal product to fall as output increases.
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be:
increasing
How Steep a Supply Curve? Consider two cities, one on a small island, and a second on a large plain.
lines start at zero Island line is steeper The Island community since the supply is less elastic.
If a restaurant has two groups of customers, seniors and nonseniors, the seniors will be offered a
lower price because they have a more elastic demand
Restaurant Pricing. Consider a restaurant that charges $ 20 for all you can eat and has 25 customers at this price. The slope of the demand curve is −$0.20 per meal, and the marginal cost of providing a meal is $4.
marginal cost --> straight line 4$ The marginal revenue has twice the slope as the demand line. starts at same y-intercept demand line --> x-intercept ---> y-intercept divided by slope --> 25 / 0.2 ----> y-intercept ---> 20 + (0.20 x 25) = 25 profit max quantity --> where marginal cost and revenue cross profit max price --> 25 - (.2 x profit max)
If a monopolist wants to increase the quantity sold from 3 units to 4 units, it cuts the price from $ 16$ to $ 13. The marginal revenue
marginal revenue is$13+(−3 ×3units).
In an increasing-cost industry, the long-run supply curve is
positively sloped because the greater demand for inputs and labor increases the average cost of producing the product.
A buyer or seller that is unable to affect the market price is called a __________.
price taker
Tickets and Merchandise. Consider a baseball team that has a ticket price of $40 and sells 25,000 tickets at this price. The slope of the demand curve is −$0.002. The typical fan purchases $25 worth of merchandise that costs the owner $5 to provide.
a). $40 + (−0.002 × 25,000) = -10 B). -10 + 25 -5 = 10
The short run is a period of time where __________ while the long run is a period of time where __________.
at least one input is fixed, all inputs are variable
When network externalities are present, it may create a:
barrier to entry for competing technologies due to high switching costs
Because the monopolist faces a downward sloping demand curve:
there will be deadweight loss
A patent gives its holder the exclusive right to a product for a period of __________ from the date the patent is filed with the government.
20 years
According to the graphs, which of the following is likely to happen in this market in the long run?
No other firms will enter this market
According to the graph, if a perfectly competitive firm is producing at point A, which of the following is true?
The firm earns zero economic profit.
According to the graph, which of the following is more likely to occur when moving from point A to point B?
Diminishing returns
At the break-even price,
All of the above.
Equilibrium in a market is where
the quantity of the product supplied equals the quantity demanded and the typical firm in the market maximizes its profit.
According to the graph, over what range of output do we find constant returns to scale in bookselling?
Between 20,000 and 40,000 books
Compute the Costs. Consider a firm that has a fixed cost of $60.
FC--> Stays the same TC--> ADD all the numbers MC--> change between VC's AFC--> FC/Q AVC--> VC/ Q ATC-> TC/ Q
__________ is the additional cost to the firm of producing one more unit of a good or service.
Marginal cost
What is the name for the additional output that a firm produces as a result of hiring one more worker?
Marginal product of labor
In perfect competition, the marginal revenue is the same as:
Price
In an increasing-cost industry, the
average cost increases because firms in a larger industry pay higher input prices and use less productive inputs.
Natural monopoly happens when the:
average total cost curve is decreasing
According to the graph, which change in output represents economies of scale in bookselling?
from 1,000 to 20,000 books sold per month
A monopolist will maximize profit at the level of output where:
marginal cost equals marginal revenue
A key feature of a monopoly is that
marginal revenue is less than price.
The firm's short-run supply curve is the firm's
marginal-cost curve, above the minimum of the average variable cost.
Assume that the firms in a perfectly competitive market are earning normal profits and the demand for the product increases. In the short run, the
market price will rise, and economic profits will be earned.
Assume that the firms in a perfectly competitive market are earning normal profits and the demand for the product increases. In the long run, the
market price will rise, economic profits will be earned, and new firms will enter.
The process of using public policy in order to earn economic profits is known as;
rent seeking.
Publishers charge more for hardback books because
the more casual readers are willing to wait for the lower-priced paperback.
In the short-run, the cost that is independent of the amount of output produced is called __________.
Fixed cost
In reference to the graph, at what level of output does this perfectly competitive firm maximize profit?
Q3
To prolong their monopoly power, the producers of branded drugs pay millions of dollars to
all of the above
Suppose a firm in a perfectly competitive market is earning normal profits and there is an increase in demand. In the short run, the firm earns
an economic profit as prices rise. In the long run, new firms will enter and prices will fall.
What is the firm's profit when it sells six subscriptions per month?
$72
Draw the Supply Curves. The following table shows short-run marginal costs for a perfectly competitive firm:
(20,000, 10) (30,000 , 20) (40,000, 40) (50,000, 70)
A firm produces 10 units of output at a market price of $7, a marginal cost of $7, and an average cost of $5.
(7x10)-(5x10) = 20 Is
Compute the Cost. Edward the entrepreneur takes 2 hours to cut a lawn and he cuts 500 lawns per year. He uses solar-powered equipment (truck and mower) that will last forever long dash—and could be sold at any time for $20,000. Edward could earn $20 per hour as a pedicurist. The interest rate is 10 percent.
(VC +FC) / 1,000 = ((2x12x1000) + 20,000x0.1) / 1000
A monopoly is a market structure that is characterized by:
A single seller of a good or service that does not have a close substitute.
Which of the following statements is correct?
Accounting profit is larger than economic profit.
Margarine Prices. Several years ago, people became concerned about the undesirable health effects of eating margarine. The demand for margarine dropped, decreasing its price. Some time later, the price of margarine started rising steadily, although demand hadn't been changing. After several months of price hikes, the price of margarine reached the price observed before demand decreased. According to a consumer watchdog organization, the rising price of margarine was evidence of a conspiracy on the part of margarine producers. Which of the following provides an alternative explanation for the rising price of margarine and its eventual return to the original price?
As firms exited a constant-cost industry, the equilibrium price increased.
According to the graph, what size bookstore is more likely to experience diseconomies of scale?
Bookstores that sell more than 80,000 books per month
Diminishing Returns versus Diseconomies of Scale. Which of the following statements regarding diseconomies of scale and diminishing returns is true?
Diseconomies of scale is caused by coordination problems and higher input costs.
__________ equals the firm's revenues minus all implicit and explicit costs.
Economic profit
Soybeans versus Processor Chips. Why is the market for soybeans perfectly competitive, with thousands of soybean farmers, while the market for computer processor chips is dominated by a few large firms?
Entry into the chip industry requires a relatively large investment.
An increase in the price of coffee increased the quantity supplied as land was converted from growing tea to growing coffee.
Es = (change in Q/ Midpoints of Quantity supplied) / (change in price/ midpoint price)
According to the table, which of the following are implicit costs?
Foregone salary and foregone interest
Ending a Casino Monopoly. Consider a state that initially has a single casino for gambling. Suppose the state allows a second casino to enter the market. How would you expect the entry of the second casino to affect (a) the variety of games offered in the casinos and (b) the payout (winnings) per dollar spent?
Greater variety of games; increased payout per dollar spent.
Draw the Long-Run Cost Curve. Consider the long-run production of shirts. The cost of the indivisible inputs used in the production of shirts is $400 per day. To produce 1 shirt per day, the firm must also spend a total of $5 on other inputs long dash—labor, materials, and other capital. For each additional shirt, the firm incurs the same additional cost of $5.
Long-run avg costs = LTC/output Ouput = 100 LTC = 400 + (5x100) = 900
Constant Marginal Cost. Consider a firm operating in the long run with an indivisible input that has a cost of $80. The marginal cost of production is constant at $5 per unit.
Long-run avg costs = LTC/output Ouput = 100 LTC = 400 + (5x100) = 900 1st unit: 85 12th :11.67
Which of these panels best describes the demand curve facing a monopolist?
Panel A
What point on the graph represents the price and output level that a monopolist will choose?
Point B
What is the term given to a cost that has already been paid and cannot be recovered?
Sunk costs
What is the definition of market power?
The ability of a firm to charge a price greater than marginal cost.
Which graph best depicts an industry in which the firm's average costs decrease as the industry expands production?
The graph on the left
A switch from perfect competition to monopoly increases the price and decreases the quantity sold. Consumer surplus decreases , while profit increases . The net loss to society is the deadweight loss from monopoly.
The process of using public policy to gain economic profit is rent seeking.
You have been hired to produce a DVD of a play put on by a high-school drama club. It will take you about 50 hours to make the master that is stored on a hard drive on your computer. The opportunity cost of your time is $20 per hour. The marginal cost of burning DVDs is constant at $2. Average cost is total cost divided by the number of DVDs burned. Total cost is the cost of producing the master plus the cost of burning the DVDs. It costs $2 to burn each DVD.
The total cost and average cost of the first DVD is (50 hours×$20)+$2 = The average cost of the 50th DVD is = TC/ Q = [ 1,000 + (50x2)] / 50 The average cost of the 100th DVD = TC /Q To produce a single DVD is very expensive, but, as you can see, average cost falls rapidly as output increases. 1002 22 12
What happens when network externalities are present?
The usefulness of a product increases with the number of consumers who use it.
Which of the following is a characteristic of a perfectly competitive market?
There are large numbers of buyers and sellers.
As the quantity produced by a monopolist increases, the gap between the marginal revenue curve and demand curve increases .
To maximize profit, a monopolist picks the quantity at which marginal revenue equals marginal cost
In which of the following situations can a firm be considered a monopoly?
When a firm can ignore the actions of all other firms
A firm will operate so long as the price
exceeds average variable cost.
A firm will operate so long as revenue
exceeds variable cost.
The government only grants a patent for a product that would otherwise not be developed.
false
A firm in perfect competition earns profit if:
price is greater than average total cost
To maximize profit, the firm chooses the quantity of output that generates the largest
vertical difference between the total revenue curve and the total cost curve.
In the long run, the monopolist can earn:
zero or positive economic profit
According to the graph, what is the marginal cost of producing the 50th cup of tea?
$2.00
At which price in this graph is the perfectly competitive firm earning negative economic profit?
$250
According to the data in the table, what is the marginal cost of producing the 640th pizza?
$43.33
Tax Cuts for Discounters? Consider the following statement from a member of a city council: "Several of the merchants in our city offer discounts to our senior citizens. These discounts obviously decrease the merchants' profits, so we should decrease the merchants' taxes to offset their losses on senior-citizen discounts." Do you agree or disagree? Disagree
Airline Pricing. Consider an airline that initially has a single price of $300 for all consumers. At this price, it has 140 business travelers and 70 tourists. The airline's marginal cost is $150. The slope of the business demand curve is −$4 per traveler, and the slope of the tourist demand curve is $-2 per traveler. Does the single-price policy maximize the airline's profit? No The airline should increase the price it charges business travelers and it should decrease the price it charges tourists.
Payoff for Casino Approval. In 1993, seven Native American Tribes in Michigan cut a deal with the state. In exchange for being granted a monopoly in Vegas-style casino gambling, the tribes agreed to pay the state and local governments a share of its profits. By 1998, the profit sharing totaled more than $183 million. Why did the tribes propose this deal?
All of the above.
If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees?
As a part of fixed cost
The market price for wheat is $10. If a farmer's marginal cost is $7, the farmer should produce more output.
At the current output level, a farmer's marginal cost of producing sugar is $0.49. If the price of sugar is $0.44 per pound, the farmer should decrease production. If the price of sugar is $0.53 per pound, the farmer should increase production.
Increase in Housing Demand in Britain versus the United States. a. Suppose that in both Britain and the United States, the initial equilibrium price of housing is $200,000. Britain has more severe restrictions on residential development in the short run.
Britain is steeper . The price increase is larger in Britain because that country has a relatively inelastic supply curve. the price of housing to increase in both countries.
Changing Costs. Consider the paddle production example shown in the table below, where all costs and output are in dollars and paddles per day, respectively:
Change Out Put Change fixed cost then do ATC ( output of 10) = TC/ output The short-run average cost for 10 paddles is $25 nothing.
Changes in the Break-Even Price. Consider a switchgrass farmer whose initial break-even price is $76 = $36 explicit cost + $40 opportunity cost for land. For each of the following changes, explain the effects on the farmer's production cost and break-even price. a. If the cost of fertilizer increases, the break-even price will increase . b. If the market price of alfalfa decreases, the break-even price will decrease .
Changes in the Break-Even Price. Consider a switchgrass farmer whose initial break-even price is $76 = $36 explicit cost + $40 opportunity cost for land. For each of the following changes, explain the effects on the farmer's production cost and break-even price. a. If the cost of fertilizer decreases, the break-even price will decrease . b. If the market price of alfalfa decreases, the break-even price will decrease .
Consumer Compensation. Consider the chapter opener about campus beverage monopolies. Your job is to fully compensate each student for the cost associated with a soft-drink monopoly. Suppose Coca-Cola increased the price of soft drinks by $0.20 per can and each student consumed 10 soft drinks before the monopoly was granted. a. Kate continues to buy 10 soft drinks at the higher price. What is the appropriate compensation? $ 2.00 (enter your response rounded to the nearest penny). b. Elise buys only 4 soft drinks at the higher price. Her demand curve is linear. What is the appropriate compensation? $ 1.40 (enter your response rounded to the nearest penny).
Compute the change in consumer surplus: The area of a rectangle $0.20 high by 4 units long plus the area of a triangle $0.20 high by 6 units long. .8+.6
Based on the relationship between average total cost and marginal cost, which of the curves appears to be average total cost?
Curve 2
Which of the following is not true when the firm experiences diminishing marginal product?
The total product is decreasing.
According to the graph, which demand curve is associated with the shutdown point for this perfectly competitive firm?
Demand curve 2
The Price of Haircuts. The haircutting industry in your city uses a tiny fraction of the electricity, scissors, and commercial space available on the market. In addition, the industry employs only about 100 of the 50,000 people who could cut hair. .
Demand goes up to the right (starts at 30.00) SLR --> straight line at 15.00 C--> (100,15.00) b--> (80, 17.00) no
Price discrimination is the practice of:
Dividing consumers into two or more groups and charging different prices to each group.
Deregulation and the Cost of Trucking. Suppose the government initially limits the number of trucking firms that can haul freight. The market for truck freight is initially served by a single firm that produces 5 million ton miles of service per year, where 1 ton mile is the hauling of 1 ton of freight 1 mile. The newly elected governor has proposed that other firms be allowed to enter the market. At a public hearing on the issue of eliminating the entry restrictions, the manager of the existing firm issued a grim warning: "If you allow entry into the market, 4 or 5 firms will enter, and the unit cost of truck freight will at least triple. There are big economies of scale in trucking, so a single large firm is more cost-efficient than several small firms would be." What's your reaction to this statement?
Economies of scale are slight. Unit cost will rise, but not by much
Which of the following are sometimes called accounting costs?
Explicit
Compute the Short-Run Costs. Compute short-run marginal cost (MC), short-run average variable cost (AVC), and short-run average total cost (ATC) for the different quantities of output. (Enter your responses as integers.)
FC--> TC- VC
Deadweight Loss and Demand Elasticity. Using the linked figure as a starting point, consider a similar product that has the same monopoly price and quantity ($18 and 200 doses), but a more elastic demand.
FLatter larger, larger
The National Park Service Monopoly. The National Park service grants a single firm the right to sell food and other goods in Yosemite National Park.
Fewer goods will be sold at higher prices. The firm will gain, consumers will lose, and there will be a deadweight loss. Yes. With an auction, monopoly profits will go to the government.
According to the data in the table, when the price is $4, the firm would produce:
Four units of output, although it would suffer a loss from doing so
Which graph is representative of a typical average total cost curve?
Graph B
Assume bagged ice is a constant-cost industry in long-run equilibrium. If a natural disaster occurs that knocks power out for several weeks, what happens? Demand increases which increases price in the short run. New supply is shipped in from out of state which then lowers prices.
In a constant-cost industry, the long-run supply curve is horizontal.
In a constant-cost industry, when demand increases the long-run equilibrium price does not change
In a constant-cost industry, when demand increases the long-run equilibrium price does not change
In the table above, suppose the relationship between industry output and the total cost for the typical firm is linear, and each firm produces six shirts. If there are 400 firms in the industry, the total cost for the typical firm is
In the table above, suppose the relationship between industry output and the total cost for the typical firm is linear, and each firm produces six shirts. If there are 400 firms in the industry, the total cost for the typical firm is $96 (enter your response as an integer) and the average cost per shirt is $ 16. Another point on the supply curve is a price of $16 and a quantity of 2400 shirts.
Pricing with Zero Marginal Cost. Consider a monopolist who owns a natural spring that produces water that, according to nearby residents, has a unique taste and healing properties. The monopolist has a fixed cost of installing plumbing to tap the water but no marginal cost. The demand curve for the spring water is linear.
MR --> (0,8.00) (30,0) D--> (0,8) (60,0) A --> where MR intersects demand on demand line MC --> 0 -1
You want to determine the profit-maximizing quantity for a monopolist. You can ask the firm's accountant to draw the firm's revenue and costs curves, but each curve will cost you $1,000. From the following list, indicate which curves you will request: average total cost, average fixed cost, average variable cost, marginal cost, demand, marginal revenue.
Marginal revenue and marginal cost.
In which of the following market structures is the firm's demand curve the same as the market demand for the product?
Monopoly
Which of the following is an effect of a monopoly?
Monopoly causes a reduction in consumer surplus.
Which of the following statements regarding natural monopoly is true?
Natural monopoly is most likely to occur in markets where fixed costs are large relative to variable costs.
Operate or Shut Down? Referring to the figure at right, suppose the market price of shirts drops to $3.25. At this price, the marginal principle will be satisfied at point c on the marginal-cost curve. The price of $3.25 is greater than AVC, so the firm will be better off operating at a loss .
Operate or Shut Down? Referring to the figure at right, suppose the market price of shirts drops to $2.00 At this price, the marginal principle will be satisfied below point d on the marginal-cost curve. The price of $2.00 is less than AVC, so the firm will be better off shutting down .
Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity?
Opportunity cost
What is occurring from the origin up until point A in this graph?
Output increases at an increasing rate.
At the current level of output, the marginal cost of MP 3 playersMP3 players is less than is less than the average cost. If you increase output, the average cost will decrease
Over the positively sloped portion of the short-run average-cost curve, the effect of ________ dominates the effect of ________. diminishing marginal returns; falling average fixed cost
In this graph, the market is initially in long-run equilibrium at point A. If this is a constant-cost industry, after the decrease in demand, which point is likely to be a short-run equilibrium and which point is likely to be the next long-run equilibrium?
Point D is a short-run equilibrium and point C is the new long-run equilibrium.
According to the graph the shut-down point corresponds to:
Point d
Paying to Keep a Generic Out. Suppose your firm produces a branded drug at an average cost of $2 per dose and a price of $5 per dose. You sell 1,100 doses per day. If a generic version of the drug were introduced, your daily sales would decrease to 300 doses.
Q x (P-AC) = 1,100 x (5-2) = 3,300 300 x (5-2) = 900 3,300- 900 = 2400
As the market demand shifts to the left, how will the firm's level of output change?
The firm will decrease its output and suffer losses.
When a competitive market is in equilibrium, what is the economically efficient level of output?
The output where marginal cost is exactly equal to marginal benefit.
Sugar Import Ban. The sugar industry is another example of an increasing-cost industry. If the price of sugar is only 11 cents per pound, sugar production is profitable in areas with relatively low production costs, including the Caribbean, Latin America, Australia, and South Africa. At a price of 11 cents, the world supply of sugar equals the amount produced in these areas. As the price increases, sugar production becomes profitable in areas where production costs are higher, and as these areas enter the world market, the quantity of sugar supplied increases. For example, at a price of 14 cents per pound, sugar production is profitable in some countries in the European Union too. At a price of 24 cents, production is profitable even in the United States. a. If the world price is 13 cents per pound, what areas of the world supply sugar to the world market and the United States?
The Caribbean, Latin America, Australia, and South Africa. 0.24
A decrease in price decreases a perfectly competitive firm's marginal revenue, so it decreases the quantity supplied. This is the law of supply in action.
The break-even price for switchgrass varies with fertility of the land , and on average is $76 per ton.
A monopoly is inefficient solely because the monopolist gets a profit at the expense of consumers. False
To show the deadweight loss from monopoly, we compare the monopoly outcome to what would happen under a perfectly competitive market .
If the monopoly profits are large enough to offset the substantial research and development costs of a new product, a firm will develop the product and become a monopolist.
True
When is output lower than the efficient level?
When marginal benefit is greater than marginal cost
Your firm has a price of $4, an average total cost of $6, and an average variable cost of $3. In the short run, you should operate because price exceeds average variable cost In the long run, you should exit the market because average total cost exceeds price .
When the price of zinc dropped below $1,900, the price dropped below Alcoa's shutdown price, so the company closed mines .
According to the table of data, when do diminishing returns in the production of pizzas begin?
When the third worker is hired
Whenever the marginal value is less than the average value, the average value will fall .
Whenever the marginal value is more than the average value, the average value will rise .
Advice for an Unprofitable Firm. You've been hired as an economic consultant by an unprofitable price-taking firm that produces baseball caps. The firm already has a factory, so it is operating in the short run. The price of caps is $5, the hourly wage is $12, and each cap requires $1 worth of material. The firm has experimented with different workforces and the results are shown in the first two columns of the table below.
Workers = 14 Caps= 56 LC = hourly wage x workers Material cost = output x cost Variable cost = labor cost + material cost Total revenue = Price of caps x output Marginal cost = VC (of 15) - VC (of 14) / MC (of 15) - MC (of 14) 168, 56, 224, 280, 180, 60, 240, 300, 4 Is it sensible to continue to operate at a loss with 14 workers? According to the shut-down rule, the firm should continue to operate in the short run as long as total revenue is greater than variable cost. Would it be better to operate with 15 workers? According to the marginal principle, the firm should increase output as long as marginal cost is less than price.
You've been hired as an economic consultant by a price-taking firm that produces scarves. The firm already has a factory, so it is operating in the short run. The price of scarves is $9, the cost per worker is $24, and each scarf requires $1 worth of material. The following table shows the relationship between the number of workers and the output of scarves.
Workers= 12 output= 41 Labor cost = 24 X12 =288 material cost = 41 X 1 = 41 Fixed = 2 Total = ^add all of the numbers above = 331 MC = TC (of 12 workers) - TC (of 11 workers) / MC (of 12) - MC (of 11) = 3 Profit is maximized at the output at which marginal cost is equal to price. What is the profit-maximizing output? (price of scarves = MC)
The short-run market supply curve is
a curve showing the relationship between the market price and the quantity supplied in the short run.
Patent for NoSmak. A potential new drug, NoSmak, cures lip-smacking with one dose, but research and development would cost $80 million. The monopoly profit (earned while a single firm produces the product) will be $10 million per year. After a patent expires, the original developer of the drug will have sufficient brand loyalty to earn $4 million per year for another 10 years.
a). (80 - 40 million) /10 b). (80/10 ) = 8
Book Pricing: Publishers versus Authors. Consider the problem of setting a price for a book. The marginal cost of production is constant at $20 per book. The publisher knows from experience that the slope of the demand curve is minus−$0.20 per textbook: Starting with a price of $44, a price cut of $0.20 will increase the quantity demanded by one textbook, or for every dollar the price falls, five more textbooks are purchased. For example, here are some combinations of price and quantity:
a). 40 b). 30 c. profit, revenue d. the royalty payment was based on profit, not revenue
Empty Seats. Consider the Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of $6,000: The team incurs this cost regardless of how many people attend a game. The demand curve for hockey tickets has a slope of minus−$0.001 per ticket ($1 divided by 1,000 tickets): Each $1 increase in price decreases the number of tickets sold by 1,000. For example, here are some combinations of price and quantity:
a). 6 b). 2,000 c). increase if a higher price is charged to fans with an inelastic demand and a lower price is charged to fans with an elastic demand.
Rules of Monopoly. In the board game Monopoly, when a player gets the third deed for a group of properties (for example, the third orange property), the player doubles the rent charged on each property in the group. Similarly, a player who has a single railroad charges a rent of $25, while a player who has all four railroads charges a rent of $200 for each railroad.
a. Are these pricing rules consistent with the analysis of monopoly in this chapter? Yes b. In the game, is there a deadweight loss from monopoly? No
A Better Whale Mold? Sea lions off the Washington coast eat steelhead and other fish, depleting some species threatened with extinction and decreasing the harvest of the commercial fishing industry. Rick Funk is a plastics manufacturer who has offered to build a life-sized fiberglass killer whale, mount it on a rail like a roller-coaster, and send the whale diving through the water to scare off the sea lions, their natural prey. According to Funk, it would cost about $16,000 to make the first whale, including $11,000 for the mold and $5,000 for labor and materials.
a. The cost of the first whale produced with the new mold is greater than the cost with the original mold. b. At what quantity of whales will production with the new mold be less costly than production with the original mold? 3 (Enter your response as an integer.)
Negative Marginal Revenue. The manager of your firm is puzzled because the larger the quantity of output sold, the lower its total revenue. The manager gets weekly data in a table with two columns of numbers: Quantity Sold and Total Revenue. After you do some computations and add a third and a fourth column of numbers, the manager looks at the new table and says, "Aha, now I see why selling more decreases total revenue."
a. The third column of numbers has data on percentage change in quantity , and the fourth column has data on percentage change in price If the percentage decrease in price is greater than the percentage increase in quantity, total revenue will fall.
The only legal restriction concerning price discrimination is that firms cannot use it to:
drive rivals out of business
The short-run marginal cost (MC) is
change in total cost/ change in output
The Price of Tattoos. According to a market expert, tattooing in your city is a constant-cost industry. The initial equilibrium price is $24. a. In the long run, the wage of tattoo artists remains constant as industry output increases. b. If the demand for tattoos increases and stays at the higher level for three years, the price of tattoos three years from now will be $24 .
demand --> right shift short run --> right shift ( right 2, 21) ( right 2, 25) Long-run --> 24$ E--> 24
The deadweight loss from monopoly is shown graphically by the area between the
demand and supply curves from the equilibrium quantity to the quantity supplied.
Over the positively sloped portion of the short-run average-cost curve, the effect of ________ dominates the effect of ________. A. increasing marginal productivity; falling average fixed cost
diminishing marginal returns; falling average fixed cost
In the long run, for some firms the long-run average-cost curve will be positively sloped for high output levels because of
diseconomies of scale
The downward sloping part of the long run average total cost curve is where the firm is achieving:
economies of scale
A firm making zero economic profit stays in the market because total revenue is high enough to cover all the firm's costs, including the opportunity costs of the entrepreneur's
explicit and implicit costs.
Equilibrium and Break-Even Price. The equilibrium price in a perfectly competitive industry is sometimes below the break-even price, sometimes above it, and sometimes equal to it because the
firm is a price taker and the equilibrium price is determined in the competitive market.
If the average total cost curve is above the demand curve, then this firm is:
having economic losses
If a restaurant has two groups of customers, seniors and nonseniors, the nonseniors will be offered a
higher price because they have a less elastic demand and the firm's profits will increase from sales to this group.
The monopolist charges a price that is __________ the perfectly competitive industry.
higher than
One can tell that the figure to the right shows short run costs because
total costs are positive when output is zero implying fixed costs.
