Micro Exam 2
Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day.
$176 9 × $14 = $126 in labor costs plus $50 in rent for a total cost of $176.
The total revenue from selling 6 units is ______, and the marginal revenue of selling the 6th unit is ______.
$30;0 Total revenue when either 5 or 6 are sold is $30; therefore, the marginal revenue from selling the 6th unit is zero.
Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's accounting profit is _______, and Pat's economic profit is _______.
$34,000; -$1,000 Accounting profit equals total revenue minus explicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 = $34,000. Economic profit equals total revenue minus the sum of both explicit and implicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 - $35,000 = -$1,000
Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. This firm's fixed cost each day is:
$50 The fixed factor of production is the office space, which rents for $50 per day.
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: What is John's opportunity cost of cleaning windows for an hour?
$7 Each hour john spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below. A second hour cleaning windows will yield additional earnings of ______.
$8 In the second hour John spends cleaning windows, he cleans 4 additional windows and earns $2 per window for a total benefit of $8.
If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is:
20 units Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.
Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike.
2;$6 Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 bikes and charge $12, and in the afternoon, Island Bikes will rent out 2 bikes and charge $6.
Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day?
3 The third bike yields a marginal revenue of $4, which is greater than $3, but the fourth bike yields a marginal revenue of -$4, which is less than $3. Thus, Island Bikes will rent 3 bikes and charge $12 per bike.
For a given seller, the figure below shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. If the market price of this good is $6, how many units would this seller produce?
300 The seller will continue to produce as the opportunity cost of producing an additional unit is less than or equal to price.
Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike.
3;$12 Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 out bikes and charge $12, and in the afternoon, Island Bikes will rent 2 out bikes and charge $6.
If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then Chris should make ______ mugs per day.
4 Chris should continue to expand output as long as price is at least as great as marginal cost. The marginal cost of each of the first 4 mugs is less than $7.50, but the marginal cost of the 5th mug is $8. Since $8 is greater than $7.50, Chris will only produce 4 mugs per day. [Note that at 4 mugs per day, Chris's total revenue ($30 = $7.50 × 4) is sufficient to cover his variable cost ($22 = $32 - $10), so she will not shut down.]
This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit.
4; $18 The monopolist maximizes its profit by choosing the level of output at which marginal revenue equals marginal cost, or 4 units per day. From the demand curve, we can see that at this level of output, the monopolist should charge $18 per unit.
If a one percent increase in the price of oranges leads to a five percent increase in the quantity supplied, the price elasticity of supply for oranges is ______.
5 The price elasticity of supply at a point is the percentage change in quantity supplied divided by the percentage change in price.
Refer to the table below. The law of diminishing marginal returns becomes evident after ______ units of output are produced.
66 After 66 units, larger and larger increases in the number of employee hours are needed to increase output by 33 units per day.
Which of the following is a defining characteristic of all perfectly competitive markets?
All firms sell the same standardized product
John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: Should John spend a third hour cleaning windows?
No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7. In the third hour John spends cleaning windows he cleans 3 additional windows and earns $2 per window for a total benefit of $6. He could have spent that hour earning $7 at the store, so his opportunity cost is $7. Since $6 is less than $7, he should not clean windows for a third hour.
Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing?
Not if Larry is earning more than $500 per month at his current job. If Larry is earning more than $500 per month at his current job, then if he did was Curly was doing, his economic profit would be negative.
Which of the following statements about implicit costs is true?
They measure the forgone opportunities of the firm's owners.
perfectly discriminating monopolists
a firm that charges each buyer exactly his or her reservation price
perfectly competitive market
a market in which no individual supplier (or buyer) has significant influence on the market price of the product price takers many buyers and sellers
long run
a period of time sufficiently long that all firms factors of production are variable
The short run is best defined as:
a period of time sufficiently short that at least one factor of production is fixed.
short run
a period of time sufficiently short that at least some of the firms factors of production are fixed
Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will:
all go to Duke because, if it didn't, another firm could hire Duke away. Economic rent is bid up to prevent a unique factor from moving to another firm
A market equilibrium is only efficient if:
all relevant costs and benefits are reflected in the market supply and demand curves.
The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.
allocative
fixed factor of production
an input whose quantity cannot be altered in short run
The allocative function of price cannot operate unless there is:
both free entry and free exit
Which of the following is NOT necessarily true in a market equilibrium?
both rich and poor have adequate access to the good
marginal revenue
change in firms total revenue that results from a one unit change in output
Price discrimination means charging:
different prices to different buyers for essentially the same good or service.
For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price.
equals; is less than
5 sources of market power
exclusive control over inputs patents and copyrights government licenses economies of scale network economies
In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:
firms will earn zero economic profit in the long run.
A price-taker faces a demand curve that is:
horizontal at the market price
The most important challenge facing a firm in a perfectly competitive market is deciding:
how much to produce
"Law" of Supply
in the long run the law of supply does not always apply. short run marginal costs curve has a positive slope. to maximize profit a firm only produces units of output for which the price is greater or equal to its marginal cost
If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:
increase output until marginal revenue equals marginal cost
At this monopolist's profit-maximizing level of output, it:
incurs an economic loss of $16 per day The monopolist loses $4 on each of the 4 units sold.
If it is possible to make a change that will help some people without harming others, then the situation is:
inefficient
Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ______ and the market equilibrium quantity will be ______.
inefficiently low; inefficiently high In this case, the cost of expanding output will not be fully reflected in the market supply curve for cotton, so the equilibrium quantity of cotton will be inefficiently high and the price of cotton will be inefficiently low.
factors of production
input used in production of a good or service (land, labor, capital, entrepreneurship)
variable factor of production
input whose quantity can be altered in short run
The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because:
it has to charge $1 less for each of the first 3 units of output. When the firm goes from selling 3 to 4 units of output, is has to lower its price from $8 to $7. Thus, while it gains $7 from selling the 4th unit, it loses $3 because it has to charge $1 less for the first 3 units. Thus, marginal revenue is equal to $7 - $3 = $4.
According to the law of diminishing returns, when some factors of production are fixed, in order to increase production by a given amount, a firm will eventually need to add successively:
larger and larger quantities of the variable factors of production.
For all firms, the additional revenue collected from the sale of one additional unit of output is termed:
marginal revenue
If the demand curve facing a monopolist shifts, then the monopolist's:
marginal revenue curve and profit maximizing level of output will change
The primary objective of most private firms is to:
maximize profit
Unlike economic profit, economic rent:
may not be driven to zero by competition
In many cities in the United States, a single firm provides electricity. Those firms are:
monopolists
If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.
more than double
Relative to a single price monopolist, a price discriminating monopolist generates:
more total surplus
A situation is efficient if it is:
not possible to find a transaction that will make at least one person better off without harming others.
A monopolistically competitive firm is one:
of many firms that sell products that are close but not perfect substitutes.
If a firm functions in an oligopoly, it is:
one of a small number of firms that produce goods that are either close or perfect substitutes.
E>1
perfectly elastic
E<1
perfectly inelastic
The percentage change in quantity supplied that results from a 1 percent change in price is known as the:
price elasticity of supply
The Cost-Benefit Principle tells us that a firm should continue to expand production as long as:
price of the good is greater than its marginal cost. According to the Cost-Benefit Principle, a firm should produce another unit of output as long as the extra benefit of producing that unit is greater than the extra cost. This is just another way of saying that the firm should increase output whenever price is greater than marginal cost (and it should stop when price is equal to marginal cost).
to maximize profit
produce as long as P>MC
The reason economists consider monopoly to be socially undesirable is that monopolists:
produce less than the socially optimal level of output
Total revenue minus both explicit and implicit costs defines a firm's:
profit
Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours, it earns a daily ______ of ______.
profit; $64 If the firm uses 9 employee hours, its total cost is $176 (= 9 × $14 + $50), and its total revenue is $240 (= 120 × $2). Thus, its profit is $64 (= $240 - $176).
Determinants of demand
technology input prices number of suppliers expected future prices changes in price of other products
Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:
the actions of independent, self-interested buyers and sellers.
Economies of scale exist when:
the average cost of production falls as output rises.
Marginal cost
the cost of producing one additional unit of output makes variable cost increase
Economic rent is:
the difference between the payment made to the owner of a factor of production and the owner's reservation price.
If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then:
the market equilibrium will not be efficient.
price elasticity of supply
the percentage change in the quantity supplied that results from a 1 percent change in price
hurdle method of price discrimination
the practice by which sellers offer a discount to all buyers who overcome some obstacle (works only if the cost to the buyer of overcoming the obstacle is less than the discount on the price.
In general, when the price of a variable factor of production increases:
the profit maximizing level of output falls
variable cost
the sum of all payments made to the firms variable factors of production (cost increase as firm uses more variable factors)
fixed cost
the sum of all the payments made to the firms fixed factors of production
Efficiency is an important goal because when markets are efficient:
there are more resources available to achieve other goals.
If there is excess demand in a market, then this suggests that:
there is an opportunity for mutually beneficial trades.
E=1
unit elastic
Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:
your implicit costs are $1,000 per month. Economic profit is the difference between total revenue and the sum of explicit and implicit costs. Here, then, you had revenue of $6000 and your explicit costs were $5200, so your implicit cost must have been $1000 if you earned a profit of -$200.
