Micro Final Question Pool
In the short run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
Refer to the diagram. Suppose that the demand for loanable funds is D0 and the supply of loanable funds initially is S0. If the demand for loanable funds declines to D1, the equilibrium interest rate will
decrease from F to E.
Pure monopolists may obtain economic profits in the long run because
of barriers to entry.
The special-interest effect is one that yields
large economic gains to a small number of people and small economic losses to a large number of people.
If one worker can pick $10 worth of grapes and two workers together can pick $24 worth of grapes, the
marginal revenue product of the first worker is $10. MRP (marginal revenue product) measures the change in total revenue from employing an additional unit of an input (in this case a unit of labor as measured by number of workers). If one worker can pick $20 worth of grapes, her MRP is $30; if the addition of a second worker means together they can pick $50 worth of grapes, his MRP is $20 (= $50 − $30). Because inputs are assumed to be homogeneous, it wouldn't matter which was the first worker; his or her MRP would be $30, and the second worker's MRP would be $20.
Refer to the provided table. The surplus for Producer E is
$0
Charlie is willing to pay $14 for a T-shirt that is priced at $11. If Charlie buys the T-shirt, then his consumer surplus is
$3
The minimum acceptable price for a product that producer Sam is willing to receive is 7. The price he could get for the product in the market is 7. How much is Sam's producer surplus?
0
Answer the question based on the payoff matrix for a duopoly, in which the numbers indicate the profit from following either an international strategy or a national strategy. If firm A chooses an international strategy and firm B chooses a national strategy, then the payoffs will be
$15M for firm A and $5M for firm B. In game theory, a player's profit or loss is determined by the intersection of the two (or more) players' strategic choices. In this problem, for example, if A adopts an international strategy, and B follows a national strategy, A will receive $15M and B will receive $5M.
Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be
$16.
Refer to the graphs which show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the first unit of this public good is
$18
Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $2.50, $2.25, $2.00, and $1.75. If the actual price of lemonade is $1.50 per glass, then consumer surplus in this market will be
$2.50
In the market for a particular pair of shoes, Geri is willing to pay $50 for a pair, while Jane is willing to pay $55 for a pair. The actual price that each has to pay for a pair of these shoes is $40. What is the total amount of the two women's combined consumer surplus?
$25
Assume that in the short run a firm is producing 1,000 units of output, has average total costs of $100, and has average variable costs of $75. The firm's total fixed costs are.
$25,000. Total fixed costs can be calculated as average fixed cost (AFC) times the quantity of output. AFC is the difference between average total cost (ATC) and average variable cost (AVC). If ATC is $100 and AVC is $75, then AFC is $25000 (= 100 − 75). If the quantity is 1,000 units of output, then total fixed cost is $25,000 (= 25 × 1,000).
Refer to the provided table. What is the total producer surplus in the market for all producers A, B, C, D, and E? Producer Minimum Acceptable Price Actual Price Equilibrium A $6 $15 B 7 15 C 9 15 D 11 15 E 13 15
$29
Suppose that you could either prepare your own tax return in 12 hours or hire a tax specialist to prepare it for you in 3 hours. You value your time at $25.00 an hour; the tax specialist will charge you $60 an hour. The opportunity cost of preparing your own tax return is
$300. The opportunity cost of preparing your own tax return is measured by the potential income (or similarly valued time spent in other activities) you would forgo by completing your own return versus hiring someone else. If, for example, you could complete the return in 12 hours and you value your time at $25.00 per hour, your opportunity cost would be $300 = (12 × 25.00).
The total revenue of a purely competitive firm from selling 50 units of output is $300. Based on this information, total revenue for 60 units of output must be
$360. In a purely competitive market, because the firm is a "price taker," the marginal revenue from selling an additional unit is constant at the market price. Total revenue is found by multiplying the quantity of output by the market price, so the price can be found by dividing the total revenue by the number of units sold. If, for example, 50 units are sold, generating a total revenue of $300, then the market price is $6 (= 300/300). If 60 units are sold at $6, total revenue is $360 (= 50 × 6).
Answer the question based on the following table, which shows a demand schedule. Price Quantity Demanded $5 10 4 13 3 15 2 19 1 25 At a price of $2, the total revenues of sellers will be
$38 Total revenue is found by multiplying price by the quantity demanded at that price. In this instance, total revenue is $38 (= $2 × 19).
Assume that in the short run a firm is producing 200 units of output, has average total costs of $250, and has average variable costs of $150. The firm's total costs are.
$50,000. Total costs can be calculated as average total cost (ATC) times the quantity of output. If the quantity is 200 units of output and ATC is $250, then total cost is $50,000 (= $250 × 200.
The total revenue of a purely competitive firm from selling 50 units of output is $300. Based on this information, the unit price of the output must be
$6. In a purely competitive market, because the firm is a "price taker," the marginal revenue from selling an additional unit is constant at the market price. Total revenue is found by multiplying the quantity of output by the market price, so the price can be found by dividing the total revenue by the number of units sold. If, for example, 50 units are sold, generating a total revenue of $300, then the market price is $6 (= $300/50.)
Answer the question on the basis of the following cost data. Ouput Total Cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69 The average fixed cost of producing 4 units of output is
$6.00 Average fixed cost (AFC) can be calculated as total fixed cost (TFC) divided by the quantity of output. TFC is the cost when the firm produces zero output. If, for example, total cost is $24 when output is 0, then TFC is $24. If, for example, output is 3, then AFC is $8 (= $24/3).
Answer the question on the basis of the following cost data. Output Average Fixed Cost Average Variable Cost 1 $50.00 $100.00 2 25.00 80.00 3 16.67 66.67 4 12.50 65.00 5 10.00 68.00 6 8.37 73.33 7 7.14 80.00 8 6.25 87.50 The marginal cost of the fourth unit of output is
$60.00 Marginal cost is the change in total cost (TC) from producing an additional unit of output. TC is the sum of total variable cost (TVC) and total fixed cost (TFC). TC can also be found by multiplying average total cost (ATC) by the quantity produced. If not explicitly given, ATC can be found by summing the average variable cost (AVC) and average fixed cost (AFC). If, for example, AVC = $68 and AFC = $10, then ATC = $78 (= 68+10). If five units of output are produced at an ATC of $78, then total cost is $390 (= $78 x 5). If the total cost of four units is $310, then marginal cost of the fifth unit is $80 (= $390 − $310).
Harvey quit his job at State University, where he earned $58,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $8,000 a year. To start the business, he cashed in $60,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 15,000 units of software at $60 for each unit. Of the $60 per unit, $50 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were
$72,000 Implicit costs are those for which no monetary payment is made, but income is forgone. In this case, the entrepreneur's potential salary earnings (as represented by his former salary), the value of the entrepreneur's talent in the next best alternative entrepreneurial activity, and the forgone interest are all implicit costs. The remaining information in the problem represents either revenue or explicit costs.
Harvey quit his job at State University, where he earned $62,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $4,000 a year. To start the business, he cashed in $50,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 10,000 units of software at $72 for each unit. Of the $72 per unit, $60 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The total revenues of Harvey's firm in the first year were
$720,000. Total revenue is found by multiplying the number of units sold by the price per unit. If, for example, Harvey sells 10,000 units at $72 per unit, his total revenue will be $720,000 (= 10,000 × $72 ).
Answer the question based on the following information for four highway programs of increasing scope. All figures are in millions of dollars. Program Total Cost Total Benefit A $2 $9 B 6 16 C 12 21 D 20 23 Based on the data, we can say that the marginal costs of Program D are
$8
Answer the question on the basis of the accompanying demand schedule. Price Quantity Demanded $20 1 18 2 16 3 14 4 12 5 The marginal revenue obtained from selling the fourth unit of output is
$8. Marginal revenue is the change in total revenue from selling an additional unit of output. If, for example, a firm sells 3 unit(s) of output at $16 per unit, or 4 units of output at $14 per unit, selling the fourth unit increases revenue from $48 (= 3 × $16) to $56 (= 4 × $14), so the marginal revenue of the fourth unit is $8 (= $56 − $48).
Suppose that as the price of Y falls from $10 to $7, the quantity of Y demanded increases from 600 to 800. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
0.81. The price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded (QD) divided by the percentage change in price (P). Economists use the midpoint formula to calculate over a range of prices and quantities, so that Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]. If, for example, a price decrease from $10 to $7 causes an increase in quantity demanded from 600 to 800 , then Ed = 0.81 = [(200)/(1,400/2)] / [(3)/(17/2)].
Refer to the diagram and assume a single good. If the price of the good increased from $5.70 to $6.30 along D1, the price elasticity of demand along this portion of the demand curve would be
1.2.
Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
1.37. The price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded divided by the percentage change in price. Economists use the midpoint formula to calculate over a range of prices and quantities, so that Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]. If, for example, a price decrease from $2.00 to $1.90 causes an increase in quantity demanded from 110 to 118 , then Ed = 1.37 = [8/(228/2)] / [0.1/(3.9/2)].
When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price-elasticity-of-demand coefficient for this product is
1.5. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the percentage change in price is 10 percent and the quantity demanded change is 15 percent, then price elasticity of demand is 1.5 (= 15/10).
The price elasticity of demand for widgets is 1. Assuming no change in the demand curve for widgets, a 10 percent decrease in sales implies a(n)
10 percent increase in price. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity of demand is equal to 1 and there was a(n) 10 percent decrease in sales, then there must have been a(n) 10 percent increase in price (1 = 10/X; X = 10/1).
Suppose the price elasticity of demand for bread is 0.2. If the price of bread falls by 10 percent, the quantity demanded will increase by
2 percent and total expenditures on bread will fall The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity of demand is 0.2, and price falls by 10 percent, then quantity demanded will increase 2 percent (0.2 = X/10; X = 0.2 × 10 = 2). The total-revenue test tells us that demand is price elastic when price and total revenue change in the opposite direction, and price inelastic when price and total revenue change in the same direction. Since in this example price fell and demand is price inelastic, total expenditures will fall.
The price of season tickets to a performing arts theater decreases by 4 percent. As a result, the quantity demanded increases by 10 percent. The price elasticity of demand for season tickets is
2.5. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, a 4 percent decrease in price causes quantity demanded to increase 10 percent, then the price elasticity of demand is 2.5 (= 10/4).
Output Total Cost 0 $500 1 700 2 1,100 3 1,700 4 2,500 5 4,000 The table shows the total costs for a purely competitive firm. If the product sells for $800 a unit, the firm's short run profit-maximizing (or loss-minimizing) output is
4. To maximize profits, firms want to find where the (positive) difference between total revenue and total cost is the greatest. Profit is found by subtracting total cost from total revenue at each level of output. At an output level of 3, for example, if product price is $600, total revenue is $1,800 (= 3 × 600) and total cost $1,700, profit will be $100. Of the options given in the question using these particular numbers, this yields the highest profit.
Output Marginal Revenue Marginal Cost 0 -- -- 1 $16 $13 2 16 8 3 16 10 4 16 15 5 16 22 Refer to the data in the accompanying table. If the firm's minimum average variable cost is $12, the firm's profit-maximizing level of output would be
4. With the marginal revenue = marginal cost approach a firm maximizes profit by selling up to the point where MR = MC. If there is no output level where they precisely equal, the firm should produce as long as MR > MC and stop selling before reaching a point where MR falls below MC. Using the MR = MC rule to find the profit-maximizing output assumes that price is above the minimum of average variable cost (AVC), otherwise there is no positive amount of output that yields a greater profit or smaller loss than simply shutting down in the short run. If, for example, marginal revenue is $16 and the minimum AVC is $10, the firm is better off producing. If the MC at 2, 3, and 4 units of output are 9, 13, and 17, respectively, the firm should produce the second unit (16 > 9), produce the third unit (16 > 13), but stop before producing the fourth unit (16 < 17). So the profit-maximizing output would be 3 units of output.
The supply of product X is elastic if the price of X rises by
5 percent and quantity supplied rises by 7 percent. The price elasticity of supply for a product equals the percentage change in quantity supplied divided by the percentage change in price. If the elasticity coefficient is greater than one, supply is price elastic; if the elasticity coefficient is less than one, supply is price inelastic. For the coefficient to be greater than one and the supply price elastic, the percentage change in quantity supplied must be greater than the percentage change in price.
Suppose the price elasticity of supply for crude oil is 1.5. How much would price have to rise to increase production by 9 percent?
6 percent The price elasticity of supply for a product equals the percentage change in quantity supplied divided by the percentage change in price. If, for example, the elasticity coefficient (Es) is 1.5, then it would take a(n) 6 percent increase in price to prompt an increase in production of 9 percent (1.5 = 9/X; X = 9/1.5 = 6).
The price elasticity of demand for widgets is 1.5. Assuming no change in the demand curve for widgets, an increase in sales of 12 percent implies a(n)
8 percent reduction in price. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity of demand is equal to 1.5 and there was a(n) 12 percent increase in sales, then there must have been a(n) 8 percent reduction in price (1.5 = 12/X; X = 12/1.5).
Firm Market Share (%) A 30 B 29 C 16 D 12 E 7 F 6 The four-firm concentration ratio for the industry described in this table is
87 percent. Four-firm concentration ratios measure the percentage of total industry sales comprised of the four largest firms; it is found by summing the four largest market shares in the industry. Therefore, the four-firm concentration ratio is 87 (= 30 + 29 + 16 + 12).
The elasticity of supply of product X is unitary if the price of X rises by
9 percent and quantity supplied rises by 9 percent The price elasticity of supply for a product equals the percentage change in quantity supplied divided by the percentage change in price. If the elasticity coefficient is greater than one, supply is price elastic; if the elasticity coefficient is less than one, supply is price inelastic. Supply is unitary elastic if the coefficient is equal to one, meaning the percentage change in quantity supplied equals the percentage change in price.
Assume a purely competitive increasing-cost industry is initially in long-run equilibrium, producing 8 million units at a market price of $15.00. Suppose that an increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur?
9 units at a price of $16.50. Industries are constant-cost, increasing-cost, or decreasing-cost industries based on what happens to ATC as output expands in the long run. How equilibrium price and quantity respond to an increase in consumer demand depend on whether the industry is constant-, increasing-, or decreasing-cost. In an increasing-cost industry, for example, an increase in consumer demand will increase both quantity and price. As firms produce more goods to satisfy growing demand, the resulting higher costs necessitate an increase in price.
In long-run equilibrium, a profit-maximizing firm in a monopolistically competitive industry will produce the quantity of output where
ATC = P, MR = MC < P.
The coefficient of price-elasticity of supply for a product is 0.8 if
a 5 percent decrease in price causes a 4 percent decrease in quantity supplied The price elasticity of supply for a product equals the percentage change in quantity supplied divided by the percentage change in price. If, for example, the elasticity coefficient (Es) is 0.8, then a 5 percent decrease in price will cause a 4 percent decrease in quantity supplied: 0.8 = X/5; X = 0.8 × 5 = 4.
Suppose the income elasticity of demand for toys is +0.4. This means that
a 8 percent increase in income will increase the purchase of toys by 3.2 percent The income elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in income. A positive income elasticity indicates that income and quantity demanded are directly related, and that the product is a normal good. If, for example, the income elasticity is +0.4 and income increases by 8 percent, then consumer purchases will increase by 3.2 percent (+0.4 = X/8; X = +0.4 × 8 = 3.2).
Amanda buys a ruby for $340 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $190. Amanda experiences
a consumer surplus of $0, and Tony experiences a producer surplus of $150.
Firm Market Share (%) A 40 B 30 C 10 D 10 E 5 F 5 The industry characterized by these data is
an oligopoly.
A firm in an oligopoly is similar to a monopoly in that
both firms could have significant market power and control over price.
Jennifer buys a piece of costume jewelry for $30, for which she was willing to pay $35. The minimum acceptable price to the seller, Nathan, was $15. Jennifer experiences a
consumer surplus of $5, and Nathan experiences a producer surplus of $15
The MR = MC rule applies
in both the short run and the long run.
If the price elasticity of demand for a product is 0.5, then a price cut from $3.00 to $2.70 will
increase the quantity demanded by about 5 percent. The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity is 0.5 and the absolute value of the percentage change in price is 10 percent [= (2.70 − 3.00)/3.00], then the percentage change in quantity demanded (X) is 5 percent [0.5 = X/ 10; X = 5].
A major characteristic of oligopolistic firms is that
interdependence exists between it and the other firms in the industry.
Suppose that the price of product X rises by 12 percent and the quantity supplied of X increases by 8 percent. The coefficient of price elasticity of supply for good X is
less than 1, and therefore supply is inelastic. The price elasticity of supply for a product equals the percentage change in quantity supplied divided by the percentage change in price. If the elasticity coefficient is greater than one, supply is price elastic, if less than one, inelastic. Supply is perfectly inelastic if a price change results in no change in quantity supplied.
A pure monopolist is selling twenty units at a price of $100. If the marginal revenue of the 21st unit is $16, then the
price of the 21st unit is $96. Marginal revenue is the change in total revenue from selling an additional unit of output. If, for example, a firm sells twenty units of output at $100 per unit, total revenue is $2,000. If the marginal revenue of the 21st unit is $16, then total revenue from selling 21 units must be $2,016 (= $2,000 + $16). If the firm is selling 21 units for a total revenue of $2,016, then the price of each unit must be $96 (= $2,016/21).
A pure monopolist is selling eight units at a price of $20. If the marginal revenue of the ninth unit is $2, then the
price of the ninth unit is $18. Marginal revenue is the change in total revenue from selling an additional unit of output. If, for example, a firm sells eight units of output at $20 per unit, total revenue is $160. If the marginal revenue of the ninth unit is $2, then total revenue from selling 9 units must be $162 (= $160 + $2). If the firm is selling 9 units for a total revenue of $162, then the price of each unit must be $18 (= $162/9).
Output AFC AVC ATC MC 1 $300 $100 $400 $100 2 150 75 225 50 3 100 70 170 60 4 75 73 148 80 5 60 80 140 110 6 50 90 140 140 7 43 103 146 180 8 38 119 156 230 9 33 138 171 290 10 30 160 190 360 The accompanying table shows cost data for a firm that is selling in a purely competitive market. If the market price for the firm's product is $150, the firm will
produce 6 units. As long as the market price is above minimum average variable costs, the firm should produce. The profit-maximizing firm produces to the level of output where MR = MC. (or, as long as MR > MC, but stopping short of producing where MR < MC). If, for example, price (also marginal revenue in pure competition) and marginal cost are both $150 at produce 6 units units of output, then the firm should produce 6 units.
Suppose that a business incurred implicit costs of $380,000 and explicit costs of $2 million in a specific year. If the firm sold 100,000 units of its output at $27 per unit, its accounting
profits were $700,000 and its economic profits were $320,000. Accounting profits are equal to total revenue minus explicit costs. Economic profits are found by subtracting total costs (explicit plus implicit) from total revenue (or by subtracting implicit costs from accounting profits). Suppose, for example, a business has implicit costs of $380,000, explicit costs of $2 million, and sells 100,000 units of output at $27 per unit. Its total revenue will be $2.7 million (= 100,000 × 27). Subtracting the explicit costs of $2 million gives an accounting profit of $320,000. Subtracting from that the implicit costs of $380,000 gives an economic profit of $320,000.
Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Number of Workers Units of Output 0 0 1 50 2 90 3 125 4 140 5 152 6 160 Diminishing marginal returns become evident with the addition of the
second worker. Diminishing marginal returns begin when the next input (in this case, worker) adds less to total output than the previous input. If, for example, the first worker adds 50, the second adds 40 (= 90 − 50), and the third adds 35 (= 125 − 90), until the next returns are less than the previous returns than diminishing returns begin with that worker. In this case the second worker.
If a 9 percent increase in the price of Good A results in an increase of 13 percent in the quantity demanded of Good B, then it can be concluded that Goods A and B are
substitutes goods The cross elasticity of demand for a product equals the percentage change in quantity demanded of Good B divided by the percentage change in price of Good A. A positive cross elasticity indicates that quantity demanded of B and price of A are directly related, and that the products are substitutes for each other. A negative cross elasticity indicates that the goods are complements to each other. If, for example, a 9 increase in the price of Good A causes a(n) 13 percent increase in the quantity demand of Good B, then cross elasticity is positive and Goods A and B are substitutes.
You are told that the four-firm concentration ratio in an industry is 30. Based on this information you can conclude that
the four largest firms account for 30 percent of industry sales. Four-firm concentration ratios measure the percentage of industry sales captured by the four largest firms in the industry. The ratio doesn't indicate how those sales are distributed among the top four firms, so there is no reason to expect them to have equal shares. Concentration ratios below 40 percent indicate a monopolistically competitive market structure, while ratios above 40 percent reflect oligopoly.
If a firm can sell 10,000 units of product A at $20 per unit and 11,000 at $18, then
the price elasticity of demand is approximately 0.9. The price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded (QD) divided by the percentage change in price (P). Economists use the midpoint formula to calculate over a range of prices and quantities, so that Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]. For example, if a price decrease from $20 to $18 causes an increase in quantity demanded from 10,000 to 11,000, then Ed = 0.9 = [(100)/(21,000/2)] / [(2)/(38/2)].
Answer the question on the basis of the accompanying demand schedule. Price Quantity Demanded $7 1 6 2 5 3 4 4 3 5 The marginal revenue obtained from selling the fourth unit of output is
$1. Marginal revenue is the change in total revenue from selling an additional unit of output. If, for example, a firm sells 3 unit(s) of output at $5 per unit, or 4 units of output at $4 per unit, selling the fourth unit increases revenue from $15 (= 3 × $5) to $16 (= 4 × $4), so the marginal revenue of the fourth unit is $1 (= $16 − $15).
Assume the price of a product sold by a purely competitive firm is $4.50. Given the data in the accompanying table, at what output level is total profit highest in the short run? Output Total Cost 20 $70 25 75 30 85 35 100 40 125 45 155 50 190
35 To maximize profits, firms want to find where the (positive) difference between total revenue and total cost is the greatest. Total revenue is found by taking the price times the quantity of output. Profit is found by subtracting total cost from total revenue at each level of output. At a price of $4.50, for example, total revenue from selling 35 units of output is $157.50. With a total cost of $100 (given), profit is $57.50 (= 157.50 − 100). Of the options given in the question, this yields the highest profit.
The marginal resource cost of labor for a firm refers to the
additional cost of each additional unit of labor employed.
Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will
decide to increase advertising expenditures even if it means a reduction in profits.
Refer to the diagram. The monopolistically competitive firm shown
is realizing an economic profit.
Suppose that Katie and Kelly each expect to receive $500 worth of marginal benefits from a proposed new recreation center, whereas Kerry expects to receive only $100 worth. If the proposed tax levied on each for the center would be $300, a majority vote will
pass this project and resources will be underallocated to it.
An industry comprising 100 firms, each with about 1 percent of the total market for a standardized product, is an example of
pure competition. The four market structures (pure competition, monopolistic competition, oligopoly, and pure monopoly) are classified by the number of firms in the industry, the degree of control any individual firm has over price (as represented by its share of the total market), and whether the product is standardized or differentiated. If, for example, 40 firms each control only 2-3 percent of the market for a differentiated product, that meets the criteria for monopolistic competition.
Creative destruction is
the process by which new firms and new products replace existing dominant firms and products.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $60,000 Annual lease on building = $30,000 Annual revenue from operations = $250,000 Payments to workers = $100,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's economic profit is
$-34,000. Economic profit is found by subtracting total costs from revenue. If, for example, annual revenue is $250,000 and total costs (the sum of all the cost items on the list) are $284,000, economic profit is -$34,000 (= $250,000 − $284,000).
The table shows three short-run cost schedules for three plants of different sizes that a firm might build in the long run. Plant 1 Plant 2 Plant 3 Output ATC Output ATC Output ATC 10 $10 10 $15 10 $20 20 9 20 10 20 15 30 8 30 7 30 10 40 9 40 10 40 8 50 10 50 14 50 9 What is the long-run average cost of producing 10 units of output?
$10 Firms, in their attempt to maximize profits, will seek to minimize the per-unit cost of producing whatever output level is chosen. For our hypothetical firm in this problem, if it chooses to produce 30 units of output, it can do so for $8/unit (Plant 1), $7/unit (Plant 2), or $10/unit (Plant 3). To minimize cost it will produce at $7/unit.
The following data are for a series of increasingly extensive flood-control projects. Total Cost Per Year Total Benefit Per Year Plan A = Levees $10,000 $16,000 Plan B = Small 24,000 36,000 Plan C = Medium 44,000 52,000 Plan D = Large 72,000 64,000 For Plan A marginal costs and marginal benefits are
$10,000 and $16,000, respectively.
Answer the question on the basis of the following cost data. Output Average Fixed Cost Average Variable Cost 1 $50.00 $100.00 2 25.00 80.00 3 16.67 66.67 4 12.50 65.00 5 10.00 68.00 6 8.37 73.33 7 7.14 80.00 8 6.25 87.50 The marginal cost of the sixth unit of output is
$100 Marginal cost is the change in total cost (TC) from producing an additional unit of output. TC is the sum of total variable cost (TVC) and total fixed cost (TFC). TC can also be found by multiplying average total cost (ATC) by the quantity produced. If not explicitly given, ATC can be found by summing the average variable cost (AVC) and average fixed cost (AFC). If, for example, AVC = $68 and AFC = $10, then ATC = $78 (= 68+10). If five units of output are produced at an ATC of $78, then total cost is $390 (= $78 x 5). If the total cost of four units is $310, then marginal cost of the fifth unit is $80 (= $390 − $310).
Answer the question on the basis of the following cost data. Output Average Fixed Cost Average Variable Cost 1 $50.00 $100.00 2 25.00 80.00 3 16.67 66.67 4 12.50 65.00 5 10.00 68.00 6 8.37 73.33 7 7.14 80.00 8 6.25 87.50 The average total cost of 2 units of output is
$105.00. Average total cost can be found by summing the average variable cost (AVC) and average fixed cost (AFC). If, for example, AVC = $68 and AFC = $10, then ATC = $78 (= 68 + 10).
Answer the question on the basis of the accompanying table, which shows the demand schedule facing a nondiscriminating monopolist. P Qd $ 20 1 16 2 12 3 8 4 4 5 Assume that this monopolist faces zero production costs. The profit-maximizing monopolist will set a price of
$12. Profits are maximized when the difference between total revenue and total cost is the greatest. Given that this problem assumes zero production costs, maximizing profit is then the same thing as maximizing total revenue. To find the revenue maximizing price, total revenue (= price × quantity) can be calculated for each price/quantity combination, and the largest value chosen. Using the MR = MC approach, MC = 0 when there are zero production costs, so as long as MR > 0, the firm should continue producing more and lowering price accordingly to sell the output.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $55,000 Annual lease on building = $23,000 Annual revenue from operations = $320,000 Payments to workers = $130,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's explicit costs are
$161,000. Explicit costs are those for which a monetary payment must be made. In this case, the annual lease on the building, payments to workers, and utilities are the only costs for which a payment is made. The remaining items on the list are either revenue or implicit costs.
Suppose that Joe sells pork in a purely competitive market. The market price of pork is $2.50 per pound. Joe's marginal revenue from selling the 10th pound of pork would be
$2.50. In a purely competitive market, because the firm is a "price taker," the marginal revenue from selling an additional unit equals the product's market price. Therefore if the market price is $2.50, the marginal revenue will also be $2.50.
Units of Labor Wage Rate MRC (of Labor) MRP (of Labor) 1$ 8$ 8$ 12 2 8 8 10 3 8 8 8 4 8 8 6 5 8 8 4 Refer to the given data. At the profit-maximizing level of employment, this firm's total labor cost will be
$24. A purely competitive firm will maximize profit by employing labor to the point where MRP = MRC. If, for example, the MRC (also the wage rate) is $8, and the MRP of the third unit of labor is $8, then the firm will employ 3 workers. A firm hiring 3 workers at a wage rate of $8 per worker will have a total labor cost of $24 (= 3 × $8).
Harry owns a barbershop and charges $20 per haircut. By hiring one barber at $15 per hour, the shop can provide 20 haircuts per eight-hour day. By hiring a second barber at the same wage rate, the shop can now provide a total of 36 haircuts per day. The MRP of the second barber is
$320. In purely competitive markets, MRP (marginal revenue product) equals the marginal product (MP) of an additional unit of labor times the output price (P). If, for example, adding a unit of labor raises output from 20 to 36, the MP is 16 (= 36 − 20). If P = $20 per unit, then MRP = $320 (= $20 × 16).
Output AFC AVC ATC MC 1 $300 $100 $400 $100 2 150 75 225 50 3 100 70 170 60 4 75 73 148 80 5 60 80 140 110 6 50 90 140 140 7 43 103 146 180 8 38 119 156 230 9 33 138 171 290 10 30 160 190 360 The accompanying table shows cost data for a firm that is selling in a purely competitive market. If the product price is $180, the per-unit economic profit at the profit-maximizing output is
$34 Per unit economic profit (or loss, in the case of negative numbers) is found by subtracting average total cost (ATC) from the product price (which also measures average revenue). If, for example, the market price is $180 per unit, the profit-maximizing quantity of output is 7 units. At 7 units, ATC is $146. Profit per unit is then $34 (= $180 − $146).
Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. Cost Data Demand Data Total Output Total Cost Quantity Demanded Price 0 $25 0 $60 1 40 1 55 2 45 2 50 3 55 3 45 4 70 4 40 5 90 5 35 6 115 6 30 If the firm sells 3 units of output, marginal revenue will be
$35. Marginal revenue is the change in total revenue from selling an additional unit. To find marginal revenue for a particular level of output, find total revenue (price × quantity) at that level of output, as well as the previous quantity. If, for example, the firm sells 3 units at a price of $45 each, total revenue is $135. If instead they sold 2units at a price of $50, total revenue would be $100. That means the marginal revenue of the third unit is $35 (= $135 − $100).
Assume labor is the only variable input and that an additional input of labor increases total output from 20 to 23 units. If the product sells for $12 per unit in a purely competitive market, the MRP of this additional worker is
$36. In purely competitive markets, MRP (marginal revenue product) equals the marginal product (MP) of an additional unit of labor times the product price (P). If, for example, adding a unit of labor raises output from 20 to 23, the MP is 3 (= 23 − 20). If P = $12 per unit, then MRP = $ 36 (= $ 12 × 3).
Blossom, Inc., sells 900 bottles of perfume a month when the price is $10. A huge increase in resource costs forces Blossom to raise the price to $12, and the firm only manages to sell 750 bottles of perfume. Using the midpoint formula, the price elasticity of demand coefficient is
1 and unit elastic. The price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded divided by the percentage change in price. Economists use the midpoint formula to calculate over a range of prices and quantities, so that Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)]. If, for example, a price increase from $10 to $12 causes a decrease in quantity demanded from 900 to 750, then Ed = 1 ( = 0.1818/0.1818). When the elasticity coefficient is greater than one (Ed > 1), demand is price elastic; when it is less than one (Ed < 1), demand is price inelastic.
Unit of Labor Total Product Product Price 0 0 $2.20 1 15 2.0 2 28 1.80 3 39 1.60 4 48 1.40 5 55 1.20 6 60 1.10 Refer to the table, which gives data for a firm that is hiring labor in a purely competitive market. If the wage rate is $11, how many workers will the firm choose to employ?
3 For a firm to employ an additional unit of labor, the MRP for that unit must exceed the MRC. As the wage rate falls, more units of labor become profitable. In this problem the MRC is determined solely by the wage rate, so as long as the MRP exceeds the wage rate, the firm will hire that unit of labor. At a wage rate of $11, for example, the firm will hire 3 units of labor, as the MRP of the second unit is $50.40 and the MRP of the second is $12. Additional units of labor all have MRPs below $11, so it would not be profitable for the firm to hire beyond 3 units.
A monopolist sells 10 units of a product per day at a unit price of $20. If it lowers the price to $19, its total revenue increases by $66. This implies that its sales quantity increases by
4 units per day. Marginal revenue is the change in total revenue from selling an additional unit. To calculate marginal revenue, it is first necessary to calculate total revenue (= price × quantity) at each price point. In this problem, an initial and new price, an initial quantity, and marginal revenue is given, allowing one to determine total revenue when price falls. From there one can solve for the new quantity and the change in sales. If, for example, a monopolist can sell 10 units for $20 each, their total revenue is $200. If marginal revenue is given as $66 when the price drops to $19 the new sales quantity is 47 (=66 − 19). Since the original quantity was 6, the increase in sales quantity was 4 (= 47 − 10).
Total Revenue $4,000per Week Total Variable Cost $3,000per Week Total Fixed Cost $2,300per Week Let us suppose Harry's, a local supplier of chili and pizza, has the revenue and cost structure shown here.
Harry's should stay open in the short run. A firm should produce in the short run if it is earning economic profits, breaking even (just covering its costs) or earning enough to cover all of its variable costs. If, for example, Harry's has total revenue of $4,000/week, total variable cost of $3,000/week, and total fixed cost of $2,300, it is experiencing an economic loss of $1,300 [= 4,000 − (3,000 + 2,300)]. If that loss is smaller than its fixed cost of $2,300 (how much the firm would lose if it shut down), Harry's is better off stay open in the short run.
Assume that a government is considering a new social program and may choose to include in this program one of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table below. Project Marginal Cost Marginal Benefit A $1 Billion $2 Billion B 2 Billion 3 Billion C 5 Billion 7 Billion D 7 Billion 8 Billion Suppose that the government chooses to do project C. What is the total cost and total benefit of doing project C?
Total cost is $8 billion, and total benefit is $12 billion
Refer to the profits-payoff table for a duopoly. If initially firms X and Y are charging $5 and $5, respectively,
Y would find it advantageous to lower its price regardless of whether X alters its price. In game theory, a player's profit or loss is determined by the intersection of the two (or more) players' strategic choices, and one player's best choice is sometimes determined by the choice of the other player. If, for example, X sets its price at $5, and Y sets its price at $5, Y would find it advantageous to lower its price regardless of whether X alters its price..
Farmer Jones is producing wheat and must accept the market price of $8.50 per bushel. At this time, her average total costs and her marginal costs both equal $8.50 per bushel. Her minimum average variable costs are $6.25 per bushel. In order to maximize profits or minimize losses in the short run, farmer Jones should
continue producing the same level of output. As long as the market price is above minimum average variable costs, the firm should produce, as any loss will be smaller than shutting down. Assuming the firm should produce, if MR = MC at its current level of output, it should continue to produce that level of output. If MR > MC, it should expand production; if MR < MC, it should reduce output. If, for example, the market price is $8.50, marginal and average total cost are both $8.50, and average variable cost is $6.25, the firm should continue producing the same level of output..
If a purely competitive constant-cost industry is realizing economic losses, we can expect industry supply to
decrease, output to fall, price to rise, and profits to rise. In purely competitive markets, economic profits will attract new firms and economic losses will cause some firms to leave. New firm entry will increase market supply; firm exit will reduce market supply. Regardless of the cost structure, firm entry that increases supply will, for example, increase output, reduce price, and reduce profits.
Assume that your nominal wage was fixed at $15 an hour, and the price index rose from 100 to 105. In this case, your real wage has
decreased to $14.29. To find the new real wage (after the price level change), divide the nominal wage by the price index expressed as a decimal. For example, if the nominal wage is $15 and the price index rises from 100 to 105, the real wage will fall to $14.29 (= $15/1.05). Note that whether the real wage increases or decreases to the level you calculated depends on whether the price level rises or falls. If the price level rises, real wages fall; if prices fall, real wages increase. It is possible, therefore, to have a real wage higher than the nominal wage, but still have the real wage fall. Likewise it's possible to have a real wage lower than the nominal wage, but with the real wage still rising.
Assume that Abby, Ben, Clara, Joe, and Matt are the only citizens in a community. A proposed public good has a total cost of $1,200. All five citizens will share an equal portion of this cost in taxes. The benefit of the public good is $220 to Abby, $210 to Ben, $210 to Clara, $180 to Joe, and $120 to Matt. In a majority vote, this proposal will most likely be
defeated, all 5 against.
If the demand for product X is inelastic, a 15 percent decrease in the price of X will
increase the quantity of X demanded by less than 15 percent. The price elasticity of demand for a product equals the percentage change in quantity demanded divided (QD) by the percentage change in price (P). If the percentage change in QD is greater than the percentage change in P, then demand is price elastic. In this question it is given that demand is price inelastic, so the percentage change in QD must be less than the percentage change in P. Because of the law of demand, price and quantity demanded move in the opposite direction, so the price decrease will increase the quantity demanded of X.
If the nominal wages of carpenters rose by 5 percent in 2019 and the price level increased by 3 percent, then the real wages of carpenters
increased by 2 percent. The percentage change in real wages can be measured as the percent change in nominal wages minus the percent change in the price level. If nominal wage increases exceed price level increases, then real wages rise; if the price level rises faster than nominal wages, real wages fall.
The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore, demand for X in this price range
is elastic The price elasticity of demand (Ed) for a product equals the percentage change in quantity demanded (QD) divided by the percentage change in price. For demand to be price elastic, the percentage change in quantity demand must be greater than the percentage change in price, resulting in an elasticity coefficient Ed > 1. If, for example, the price is reduced from $100 to $90, resulting in an increase in QD from 50 to 60, then Ed = [Change in quantity/(Q1 + Q2)/2] / [Change in price/(P1 + P2)/2)], or [= [(10)/(110/2)] / [(10)/(190/2)]] = 1.73. Since 1.73 > 1, demand is price elastic over the price range given.
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation
is realizing an economic Profit of $40. Profit or loss is calculated as total revenue minus total cost. Total revenue is found by multiplying price times quantity sold. Total cost is the sum of total fixed cost and total variable cost. In this problem, total fixed cost is given and total variable cost is found by multiplying average variable cost by the number of units produced. The firm produces and sells 20 units at the market price of $10, its total revenue is $200 (= 20 × $10). If its fixed cost is $100 and its average variable cost for producing 20 units is $3 per unit, then its total cost is $160 (= $100 + ($3 × 20)). Profit therefore is $40 (= 200 − 160).
A natural monopoly occurs when
long-run average costs decline continuously through the range of demand.
In pure competition, if the market price of the product is higher than the minimum average total cost of the firms, then
other firms will enter the industry and the industry supply will increase. Firm entry and exit is driven by the existence of economic profits in an industry. If the market price exceeds the minimum average total cost, economic profits are realized and new firms will enter. Firm entry increases industry supply and firm exit reduces supply.
In pure competition, if the market price of the product is lower than the minimum average total cost of the firms, then
other firms will exit the industry and the industry supply will decrease. Firm entry and exit is driven by the existence of economic profits in an industry. If the market price exceeds the minimum average total cost, economic profits are realized and new firms will enter. Firm entry increases industry supply and firm exit reduces supply.
Augi's Art Shack sells art supplies in a perfectly competitive market. The firm is currently realizing economic profits of $42,000 in the short run. In the long run we would expect Augi's to
realize economic profits of $0. In perfectly competitive markets, firm entry and exit will eliminate economic profits and losses in the long run. Regardless of how much economic profit Augi realizes in the short run, she will break even (zero economic profit) in the long run.
You are the only seller of eggs in town, and the price-elasticity coefficient for eggs is known to be 1.2. If you want to increase your sales quantity by 6 percent through a price change, what should you do to the price?
reduce price by 5 percent The price elasticity of demand for a product equals the percentage change in quantity demanded divided by the percentage change in price. If, for example, the price elasticity of demand is 1.2, and the goal is to increase sales quantity by 6 percent, there would need to be a 5 percent reduction in price (1.2 = 6/X; X = 6/1.2 = 5).
Price wars among oligopolists tend to
reduce profits for the firms.
Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $10, respectively, for the fourth unit of a public good. Also, assume that the marginal cost of the fourth unit is $20. We can conclude that
the fourth unit should be produced.
Marginal resource cost is
the increase in total resource cost associated with the hire of one more unit of the resource.
Suppose that total sales in an industry in a particular year are $500 million and sales by the top four sellers are $80 million, $25 million, $12 million, and $8 million, respectively. We can conclude that
this industry is monopolistically competitive. Four-firm concentration ratios measure the percentage of industry sales of the four largest firms in the market. Ratios less than 40 percent indicate that an industry is monopolistically competitive, while those above 40 percent typically reflect an oligopoly market structure. For example, an industry with total sales of $500 million in a year, with the top four sellers posting sales of $80 million, $25 million, $12 million, and $8 million, respectively, will have a concentration ratio of 25 percent [= (80 + 25 + 12 + 8)/500].
Output Total Revenue Total Cost 0 $0 $50 1 40 74 2 80 94 3 120 117 4 160 142 5 200 172 The table gives data for a purely competitive firm. The market price of the product in the short run is
$40. In pure competition, the firm's marginal revenue is the market price. Marginal revenue is the change in total revenue from selling an additional unit. If, for example, a firm's revenue rises by $40 for each unit it sells (total revenue rises from zero to $40 to $80, and so on), then marginal revenue and market price are $40.
The consumer price index is 94 in Year 1 and 98 in Year 2. The nominal wage rate is $20 in Year 1 and $22 in Year 2. What is the approximate percentage change in the real wage rate from Year 1 to Year 2?
5.7 percent To find the approximate percentage change in the real wage, subtract the percentage change in the consumer price index from the percentage change in the nominal wage rate. If, for example, the price index rises from 94 to 98, its percentage change is approximately 4.3 percent [= (98 − 94)/94]. If the nominal wage rate rises from $20 to $22, that percentage change is 10 percent [= (22 − 20)/20]. Thus, the approximate percentage change in the real wage is 5.7 percent (= 10 − 4.3).
Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm. If Firm B adopts the low-price strategy, then Firm A would adopt the
low-price strategy and earn $200. In game theory, a player's profit or loss is determined by the intersection of the two (or more) players' strategic choices, and one player's best choice is sometimes determined by the choice of the other player. If in this problem, for example, B adopts a low price strategy, A's best choice is to adopt a low-price strategy. Where those two strategies intersect, A earns $200 million.
The MR = MC rule
applies both to pure monopoly and pure competition.
Assume Manfred's Shoe Shine Parlor hires labor, its only variable input, under purely competitive conditions. Shoe shines are also sold competitively. Units of Labor Total Product Marginal Product Total Revenue 0 0 1 14 14 $42 2 10 3 30 90 4 35 5 39 117 6 126 7 44 2 132 At what price does each shoe shine sell?
$3 To find price, divide total revenue (TR) by the quantity of output (TP). If, for example, TR = $42 and TP = 14, then price = 3 (= $42/14). Because this is assumed to be a purely competitive market, the price will not change with the output level.
Assume Manfred's Shoe Shine Parlor hires labor, its only variable input, under purely competitive conditions. Shoe shines are also sold competitively. Units of Labor Total Product Marginal Product Total Revenue 0 0 1 14 14 $112 2 10 3 30 240 4 35 5 39 312 6 336 7 44 2 352 How many units of output are produced when 6 workers are employed?
42 Total product (TP) measures the number of units of output produced. Marginal product (MP) measures how much TP changes when another unit of labor is added.
Refer to the above graphs. The long-run equilibrium for a monopolistically competitive firm is represented by graph
B
Refer to the diagram for a monopolistically competitive producer. The firm is
realizing a normal profit in the long run.
Employment Total Product Product Price 0 0 $6 1 12 6 2 22 6 3 30 6 4 36 6 5 40 6 6 42 6
selling its product in a purely competitive market. Only in pure competition does a firm face a constant price for selling its product. There is not enough information to determine if the labor market is purely competitive or not.
