Microeconomics

1) Where along the long-run average total cost curve will an efficient firm try to produce in the long run?

A firm will produce along the segment where there are constant returns to scale. A firm producing where there are increasing returns to scale has an incentive to increase production to lower costs. A firm producing where there are decreasing returns to scale has an incentive to decrease production to lower costs

List three conditions for perfect competition

A perfectly competitive market is a market in which economic forces operate unimpeded. For a market to be called perfectly competitive, it must meet some stringent conditions. Some of these conditions include: 1. Both buyers and sellers are price takers. 2. There are no barriers to entry. 3. Firms' products are identical

List at least three sources of comparative advantage that the United States has and will likely maintain over the coming decade?

Any three of the following would be correct: (1) Skills of the U.S. labor force, (2) U.S. governmental institutions, (3) U.S. physical and technological infrastructure, (4) English as the international language of business, (5) wealth from past production, (6) U.S. natural resources, (7) U.S. intellectual property rights,

A perfectly competitive firm sells its good for $20. If marginal cost is four times the quantity produced, how much does the firm produce? Why?

Assuming perfect competition, the firm should produce where MR = MC. If the price is $20, then MR is also $20. If MC is four times the quantity, produce 5 units (MR = P = MC = 4 × 5 = 20).

If average productivity falls, will marginal cost necessarily rise? How about the average cost?

Average cost will not necessarily rise. The general relationships are: If average productivity is falling, average costs must be rising; if marginal productivity is falling, marginal cost must be rising, and marginal cost intersects the average cost curve at the same level of output that the marginal product curve intersects the average product curve.

Why must buyers and sellers be price takers for a market to be perfectly competitive?

Buyers and sellers must be price takers because if sellers set prices, they would be able to raise them to make a profit and their demand curve would not be horizontal. In a perfectly competitive market, market supply and demand determine the price; both firms and consumers take the market price as given.

What costs and revenues do economists include when calculating profit that accountants don't include? Give an example of each.

Economists include all opportunity costs as costs. This includes not only explicit costs but also implicit costs such as the opportunity costs of factors of production provided by the owners of the business. Accountants don't include this second item as a cost. Economists include changes in the value of any assets owned by the firm in revenue (implicit revenue) as well as total sales. Accountants include only total sales. An example of implicit revenue is changes in the value of any assets owned by the firm, such as the building and equipment that it owns.

True or false? Wages in China are lower than those in the United States. This means that China has a comparative advantage in everything. Explain your answer.

False. According to the theory of comparative advantage, if one country has a comparative advantage in one good, the other country must have a comparative advantage in another good.

What are four reasons why economists' and laypeople's view of trade differ?

Four reasons are: (1) Economists can identify both the costs and benefits of trade. Laypeople often do not recognize that the decline in product prices is the result of trade, while they can readily identify that lost jobs are the costs. (2) Economists know that comparative advantage implies that each country is better at producing at least one good. Laypeople worry that since wages are lower in China, it has a comparative advantage in all goods and the U.S. will lose all its jobs. Economists admit that because the U.S. has a trade deficit, the U.S. will face difficult economic forces to restore a more nearly equal division of comparative advantage (3) Economists recognize that trade occurs in more sectors than manufacturing. They see the comparative advantage that the U.S. has in trading services. Laypeople tend to see trade as trade in manufactured goods only. (4) Economists' models do not take into account the effect of trade on the distribution of income. A change in a country's comparative advantage will affect the distribution of income. Laypeople do take this into account

You're thinking of buying one of two firms. One has a profit margin of $8 per unit; the other has a profit margin of $4 per unit. Which should you buy? Why?

If both firms are producing where MR = MC and you could buy either for the same amount, you should buy the one with the highest total profit. In other words, you can't know which firm to buy from the information given. Remember, it is total profit, not profit per unit, that is maximized by a firm. If they are perfectly competitive firms, however, eventually both will earn 0 economic profits regardless of which you buy.

1) Why could diseconomies of scale never occur if production relationships were only technical relationships?

If production relationships were only technical relationships, diseconomies of scale would never occur because the same technical process could be used over and over again at the same cost. In reality, however, the social dimensions of production relationships among workers introduce the potential for diseconomies of scale because, as the firm size increases, monitoring costs increase and team spirit or morale generally decreases.

A profit-maximizing firm is producing where MR = MC and has an average total cost of $4, but it gets a price of $3 for each good it sells. a. What would you advise the firm to do? b. What would you advise the firm to do if you knew average variable costs were $3.50?

If this is a profit-maximizing firm in short-run equilibrium, its marginal cost equals price, or $3. Since ATC is $4, it is making a loss, at least in the short run. Since you don't know average variable costs, you don't know to recommend shutting down or not. The best recommendation you can give is to try to lower its costs to minimize losses and perhaps earn no profit (except normal profit). b. If we now know that AVC = $3.50, we know that price is less than the average variable cost. If AVC cannot be reduced, the firm should stop producing since it loses more by producing than it would if it shuts down.

A farmer is producing where MC = MR . Say that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $8 and the price of wheat is $6, what would you advise the farmer to do?

If this situation refers to the output level at which MR = MC, the price covers the AVC of $4, but only half of the AFC; therefore, in the short run, the farmer should still grow wheat. By producing he will lose $2 per unit, but if he did not produce he would lose $4 per unit. In the long run the farmer will go out of business.

What is the adverse selection problem?

In a market where buyers and sellers have different amounts of information about the goods for sale, a problem occurs called the adverse selection problem. The problem is that the market for quality products disappears. While the question doesn't ask for an example, here's one: In commercial dating services, the seller certainly has more information about the negative (and positive) aspects of the product than the buyer. We suspect that the market has fewer "acceptable" dates than the general population.

If the conditions for perfect competition are generally not met, why do economists use the model?

In perfect competition, the invisible hand of the market is assumed to operate unimpeded, so this model provides a useful reference point and can be used as a starting point for looking at real-world markets.

What are some reasons why a small country might not get the gains of trade?

International traders in small countries often have little competition and so keep larger shares of the gains from trade for themselves; hence, the people of the small country may not get the gains from trade

1) Why are long-run costs always less than or equal to than short-run costs?

Long-run costs are always lower than or equal to short run costs because in the long run all factors of production are variable. A firm can lower costs in the long-run by adjusting what are fixed costs in the short run. Constraints to production always raises production costs

True or false? Burning fossil fuels contributes to global warming. Thus, it makes sense for the government to place a tax on the burning of fossil fuels. Why?

Most economists consider externalities to be one of the problems where the government may have a role, though some believe that a market will develop to address those externalities. If one does believe there is a role for government, tax incentive policies allow the invisible hand to guide the trade to equate marginal social cost with marginal social benefit. Those who can reduce their use of fossil fuel most easily will reduce consumption the most. The opposite is true for those who face a higher cost of reducing consumption. In this way, the tax is better than direct regulation. A market incentive plan is another program that uses the invisible hand to lead to the optimal use. There are other issues to consider, such as whether fossil fuels do in fact lead to climate change and whether climate change is, on average, bad for society.

If neither buyers or sellers could distinguish between "lemons" and "cherries" in the used-car market, what would you expect to be the mix of lemons and cherries for sale?

Neither buyers nor sellers would have any information about the quality of the cars, so the mix would become a potluck and the distribution of problems would reflect the quality and natural aging of cars.

· Why are both non excludability and non-rivalry important elements of public goods

Non-excludability and non-rivalry both increase the ability of free riders to enjoy the benefit of the product, without paying for it.

Which of the costs discussed in the chapter is the most important when a firm is deciding how much to produce?

Of all the costs discussed in this chapter, marginal cost—the increase in total cost from increasing the level of output by one unit—is the most important for a firm deciding how much to produce. Remember the economic decision rule: If the marginal cost exceeds the marginal benefit, don't do it. If the marginal benefit exceeds the marginal cost, do it.

· How has globalization made the rich richer and poor poorer in the United States?

Outsourcing has reduced the demand for manufactured jobs, reducing employment and income in that industry. Manufacturing supported the middle class for a number of years. Globalization has also created demand for technology, finance, and trade, which all require specialized skills, and ultimately pay higher salaries. Because globalization increases the market for their skills, income in these sectors has increased enormously. The overall result is a greater disparity in income.

State three reasons for a potentially beneficial role of government intervention.

Reasons for a potentially beneficial role of government intervention include: to provide for public goods, to correct for externalities, and to address impert

Give three examples of signaling in the real world.

Signaling refers to an action taken by an informed party that reveals information to an uninformed party and thereby partially offsets adverse selection. The adverse selection problem occurs when buyers and sellers have different amounts of information about the good for sale and potentially use that information to the detriment of the other. Three examples of signaling are (1) car warranties, (2) 90-day return policies, and (3) academic credentials.

Why do smaller countries usually get most of the gains from trade?

Smaller countries tend to get more of the gains from trade because more opportunities are opened up for them. This is true only under the condition that competition among traders prevails.

1) What is the difference between technical efficiency and economic efficiency?

Technical efficiency in production means that as few inputs as possible are used to produce a given output. Economic efficiency means using the method that produces a given level of output at the lowest possible cost.

1) If a firm is experiencing learning by doing, what is likely true about the long-run average total cost curve? Explain your answer.

The long-run average total cost curve is shifting down. Learning by doing means that workers can produce more with fewer inputs, shifting the short-run average total cost curve down. If the short-run average total cost curve shifts down so will the long-run average total cost curve

If machines are variable and labor fixed, how will the general shapes of the short-run average cost curve and marginal cost curve change?

The shapes of the short-run average cost curve and marginal cost curve would be the same as in the more usual case where machines are the fixed factor. Either way you are still adding more and more of a variable factor to a fixed factor and encountering diminishing marginal productivity as a result. The marginal cost and average cost curves would be U-shaped.

How is a firm's marginal cost curve related to the market supply curve?

The sum of all individual firms' marginal cost curves (above the minimum AVC curve) is the market supply curve.

What distinguishes the short-run from the long run?

The terms short run and long run do not necessarily refer to specific periods of time but rather to the degree of flexibility a firm has in changing the level of output. In the long run a firm can vary its inputs as much as it wants, while in the short run these variations can be so costly that we consider them as fixed. Simply stated, in the short run some inputs are fixed while in the long run all inputs are variable.

1) 1. A pair of shoes that wholesales for $28.79 has approximately the following costs: Manufacturing labor $ 2.25 Materials 4.95 Factory overhead, operating expenses, and profit 8.50 Sales costs 4.50 Advertising 2.93 Research and development 2.00 Interest .33 Net income to producer 3.33 Total $28.79 a. Which of these costs would likely be a variable cost? b. Which would likely be a fixed cost? c. If output were to rise, what would likely happen to average total costs? Why

Variable costs would likely include mmanufacturing labor, materials, and possibly sales costs (to the extent that they are for the sale of additional production). Certain other costs have a variable component to them, but they will unlikely vary directly with production. b. Fixed costs would likely include: Factory overhead, operating expenses and profit, research and development, interest, and, to some extent, advertising. In the real world, the division between fixed and variable costs is not as clear-cut as it is in the textbooks. c. If output were to rise, average total cost would likely fall because fixed costs are spread over a higher level of production. This is the case for many real-world firms.

What is the difference between marginal product and average product?

Whenever you see the term "marginal," it implies "additional." Thus marginal productivity is the additional output that a firm will receive with one additional variable input (workers), assuming all other inputs are constant. Whenever you see "average," you divide by the quantity. Thus, the average product is the output divided by the number of workers.

Perfect competition is analytically elegant. a. What percentage of an economy's total production do you think is provided by perfectly competitive firms? b. Based on your answer to a, why does the text spend so much time on perfect competition?

a. As a market structure, perfect competition is only a small percentage (possibly almost zero) of the real-world economy. Most economists believe that the perfectly competitive model serves as a useful reference point to analyze real-world economies, but some see it as making it easy for students to be taught a belief system that free markets are the best of all possible worlds. b. The text spends so much time on perfect competition because the model provides a useful starting point for understanding firm behavior. Students need to be reminded, however, that it is only a starting point and that all the issues that are not brought into the analysis must, at some point, be considered.

1) One farmer can grow 1,000 bushels of corn on 1 acre of land with 200 hours of labor and 20 pounds of seed. Another farmer can grow 1,000 bushels of corn on 1 acre of land with 100 hours of labor and 20 pounds of seed. a. Could both methods be technically efficient? b. Is it possible that both of these production processes are economically efficient?

a. Because the second farmer can produce the same amount of corn with fewer hours of labor and the same amount of seed, both methods cannot be technically efficient. Only the second farmer is technically efficient. b. All economically efficient methods are also technically efficient. However, the first method is not technically efficient. So it is not possible for both methods to be economically efficient.

1) A dressmaker can sew 800 garments with 160 bolts of fabric and 3,000 hours of labor. Another dressmaker can sew 800 garments with 200 bolts of fabric and 2,000 hours of identical labor. Fabric costs $100 a bolt and labor costs $10 an hour. a. Is it possible for both methods to be technically efficient? Why or why not? b. Is it possible for both methods to be economically efficient? Why or why not?

a. It is possible that both methods are technically efficient because neither dressmaker is using more of both inputs to produce the same number of garments. b. The economically efficient method is the least-cost method. The cost of 800 garments for the first dressmaker is $42,800 [(160 × $80) + (3,000 × $10)]. The cost of the same number of garments for the second dressmaker is $36,000 [(200 × $80) + (2,000 × $10)]. Therefore, the second method is more economically efficient than the first.