Seller Choice 1
Dimishing marginal returns
a level of production in which the marginal product of labor decreases as the number of workers increases
increasing marginal returns
a level of production in which the marginal product of labor increases as the number of workers increases
When marginal cost and average cost are equal
average cost must be at its minimum
when marginal cost exceeds average cost,
average cost will increase
When marginal product of labor is increasing,
marginal cost is decreasing
When marginal product of labor falls
marginal cost must rise.
When marginal product of labor starts to decline,
marginal cost starts to increase.
Given that wages are fixed
marginal product of labor increases, marginal cost must decrease
short run fixed costs
remain constant (cannot be avoidable)
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
marginal revenue
the additional income from selling one more unit of a good; sometimes equal to price
marginal cost
the cost of producing one more unit of a good
when MR=MC
the firm will reach maximum profit
Outputs
the goods, services, and ideas that result from the conversion of inputs
marginal product of labor
the increase in the amount of output from an additional unit of labor
The firm's total cost (TC) increases by
the marginal cost (MC)
The firm's total revenue (TR) increases by
the marginal revenue (MR)
Inputs
the resources—such as labor, money, materials, and energy—that are converted into outputs
distance shrinks as output increases because as output increases,
the same constant total fixed cost is spread over a larger output so AFC declines with increasing output.
average product of labor
the total output produced by a firm divided by the quantity of workers
average total cost
total cost per unit of output
average fixed cost
total fixed cost per unit of output
average revenue
total revenue divided by the quantity sold
profit
total revenue minus total cost
average variable cost
total variable cost per unit of output.
A firm's total product curve shows a how the amount of output changes when the quantity of labor changes. b that in the long run the firm must adjust the quantity of all the resources it employs. c that inefficiency is not possible. d how the cost of the fixed resources change when output changes.
A
Suppose that total cost is and marginal cost is . For what quantity is average total cost minimum? aq=4 b q=0 c q=5 d q=8
A
At 1,000 units of output, the fixed cost of production is $12,500 per week. Total cost of producing 1,000 units per week is $28,500 per week. The variable cost of producing 1,000 units of output per week is equal to _____. a $16,000 b $41,000 c$16 d$41,000,000
A $28,500 - $12,500 = $16,000
A firm's average revenue equals ________. a The market price b Average total cost c Fixed cost d Price divided by quantity
A TR = P*Q. Dividing both sides by Q, we get AR (average revenue) is equal to price. In other words, at any level of output, the average revenue per unit is just equal to the market price. This makes sense, since all units were sold at the market price to begin with.
perfectly competitive markets
A market with many buyers and sellers, with each seller offering the same good or service. Consumers and producers are aware of quality of inputs and goods and prices. Firms can easily enter and exit the industry.
total product
All the goods and services produced by a business during a given period of time with a given amount of input
Law of Diminishing Marginal Returns
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
When marginal cost is below average cost
Average cost must be falling
Based on the data in the table, which worker at Decent Donuts has the highest marginal product? a the fifth b the sixth c the fourth d the seventh
B
Diminishing marginal returns to labor occur because a workers become more efficient over time. b the capital resources used by the firm are fixed in the short run. c after awhile it is hard to find a good worker. d larger companies are less efficient.
B
In the above table, between what two levels of output does one first observe the law of diminishing returns? a 0 and 1000 b 3000 and 4000 c 4000 and 4500 d 1000 and 3000
B
Using the table, for which of the following levels of employment does the marginal product of labor exceed the average product of labor at Decent Donuts? a seven workers b four workers c both of the above d neither of the above
B
Consider this example: The total cost of producing 1,000 units of output is equal to $55,000 per week. The total cost of producing 1,010 units is equal to $55,500 per week. The marginal cost of increasing output from 1,000 units per week to 1,010 units per week is: a $500 b $50 c $10 d $5
B ($55,500 - $55,000)/(1,010 - 1,000) = $500/10 = $50
In a perfectly competitive industry, the industry demand curve is __________. aUpward sloping bDownward sloping c Horizontal dVertical
B The industry demand is a normal market demand showing that at higher prices consumers will purchase fewer units and at lower prices consumers will purchase more.
In order to maximize profits, this firm should produce approximately ______ units of output. a 7 b 8 c 11 d 15
C
Increasing marginal returns to labor might occur at low levels of labor input because of a differing factor proportions. b increasing average costs. c increasing specialization of tasks. d decreasing use of machinery and increasing use of technology.
C
The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total fixed cost of producing 64 bikes? a $400 b $500 c $200 d $300
C
The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total variable cost of producing 60 bikes? a$400 b $500 c $300 d $200
C
Which of the following graphs represents the marginal revenue (MR) curve of a firm in a perfectly competitive market? aA b B c C d D
C
If labor represents the only variable input a firm owner uses and the wage rate is $200 per week, what is the firm owner's variable cost per week if she hires 12 workers? a $200 b $1,200 c $2,400 d It depends on the level of output.
C $200 * 12 = $2,400
Alicia is currently spending $6,000 per week on variable costs to produce 500 hats. To produce 505 hats per week, she would have to spend $6,100 on variable costs per week. The marginal cost per hat is ______. a $6,100 b $100 c $2 d $5
C ($6,100 - $6,000)/(505-500) = $100/5 = $20
The fixed cost of producing wedding cakes is $10,000 per month. The variable cost for producing 10 wedding cakes per month is $12,000. The average total cost of producing 10 wedding cakes per month is ____. a $1,000 b $1,200 c $2,200 d$22,000
C Average cost is total cost ($10,000+ $12,000) divided by output (10). $22000/10=$2,200
Why can't a single firm in a perfectly competitive industry influence the market price? a Its costs are too high b It is not allowed to advertise c Its production level is too small to affect the market d It is a price maker
C In perfect competition, we assume that each firm is a small "drop in the bucket." Each is too small to influence the price by themselves. If there are over 10,000 firms, a single firm will not have any influence on the market conditions.
Suppose that at the current level of output the marginal product of labor is 45 units per week and the average product of labor is 32 units per week. The average product of labor must be ______________. a Equal the marginal product of labor b Falling c Rising dStaying the same
C MP>AP, therefore AP is rising.
A firm will maximize profits at the output level where which of the following is true? a Average cost is equal to marginal revenue b Marginal cost is total revenue c Marginal cost is equal to marginal revenue d Average total cost is equal to average revenue
C This is the output decision rule for a firm that maximizes profit. Keep expanding production if MC < MR, and then stop at the output level where MC = MR. Doing so will maximize your profit. If you keep producing past this point, you'll start lowering profit since you'll be producing at a point where the MC is greater than the price. Remember that we assume a constant price but upward-sloping MC function. Also remember that in perfect competition, P = MR for a single firm.
In a perfectly competitive market, what happens to a firm that sets its price slightly above the market price? a The firm's profit will decrease by an amount that depends on the elasticity of demand for the product b The firm's total revenue will decrease c The firm will not sell any units at all d The firm will earn higher profits as long as the other firms continue to charge the market price
C With products being perfect substitutes (homogenous goods), the price must be the same since the goods are the same. If one person tries to sell at a higher price, he'll sell zero since buyers can buy the same identical good at a lower price from another seller.
fixed costs
Costs that do not vary with the quantity of output produced
In the figure, when 40 units are produced the average fixed cost is a$12 b$8 c$20 d$4
D
Refer to the diagram to the right representing a firm's total revenue (TR) and total cost (TC) curves. Suppose the firm is currently producing units. What happens if it expands output to units? a It will be moving toward its profit maximizing output. b Its profit increases by the size of the vertical distance df. c It incurs a loss. d It makes less profit.
D
The table shows the short-run total product schedule for the campus book store. What is the average product (AP) of the 4th employee? a 18 books sold b 58 books sold c 13.3 books sold d 14.5 books sold
D
An increase in the fixed cost will cause average total cost to ______________ and marginal cost to ______________. a Increase; decrease b Not change; not change c Increase; increase d Decrease; decrease e Increase; not change
D As the price of the fixed input rises, even though the amounts cannot be changed in the short run, the level of fixed cost will rise. This will change average cost, but will not change marginal cost. All of marginal cost consists of variable costs.
Juan wants to increase production at his confection shop. If he hires one more worker, he can increase output by 100 candies per week. A confection worker's weekly wage is $200. Juan's marginal cost of increasing output by 100 candies per week is ______. a $0.50 b $1.00 c $1.50 d $2.00
D Change in total cost/change in output =$200/100=$2
In perfect competition, the demand curve for an individual firm's product is _________. a Downward sloping b Relatively elastic c Perfectly inelastic d Perfectly elastic
D The demand is horizontal (perfectly elastic) since the firm has no control over the price. They must charge the market price for their good, meaning the firm has zero power to raise their price. If they attempt to raise the price, consumers will all move on to another identical good at a lower price, and that firm will sell nothing. Firms will also not want to lower the price of their good since they can sell as much as they want at the going market price.
total revenue
Price x Quantity
Rational Rule for Sellers
Sell one more item if the marginal revenue is greater than (or equal to) marginal cost.
Average total cost curve (ATC ) and average variable cost curve (AVC) are both ____ shaped
U The reason stems from the size of fixed cost compared to the size of variable cost. Fixed cost is a large portion of total cost at low levels of output.
Avoidable Costs
a cost that can be eliminated by choosing one alternative over another
sunk cost
a cost that has already been committed and cannot be recovered
demand curve facing the firm
a curve that indicates, for different prices, the quantity of output that customers will purchase from a particular firm
long run fixed costs
can become avoidable
variable costs
costs that vary with the quantity of output produced
if MC>MR, the firm's profit will
decrease
MR>MC, the firm's profit will
increase