ECO 215 Ch 6

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Sunk costs

costs that have already been incurred and cannot be recovered and should not affect current and future production decisions (Ch 6)

free entry

the ability of a firm to enter an industry without encountering legal or technical barriers

free exit

the ability of a firm to exit an industry without encountering legal or technical barriers

production function

the relationship between quantity of inputs used and the quantity of output produced (Ch 6)

Salmon fishing in Alaska is a seasonal​ business; May through September is the best time to bait salmon and halibut. Toland​ Fisheries, a small commercial​ fishery, recorded its highest ever catch last year. They started this​ year's fishing season with the same number of workers and equipment. With the new season also starting​ well, Toland has increased hiring substantially.​ However, the fishery did not make any additional investment in trawlers and other fishing equipment. Other things remaining​ unchanged, what is likely to happen to the marginal product of each new worker in the short​ run?

It will be increasing at a decreasing​ rate, meaning each additional worker will have a lower marginal product of labor than the previous one hired.

How would the introduction of legal/technical barriers to entry affect the long-run EQ in a perfectly competitive market?

It would reduce any downward pressure on prices from entry and allow economic profits in the long run (Ch 6)

You are planning to build an apartment building. Your market research department estimates that your revenues will be ​$800,000. Your engineering department estimates the cost will be ​$550,000. You started construction and spent ​$150,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to ​$399,950. Should you complete the apartment​ building?

No, the remaining cost to build is ​$400,000 and you only expect to earn ​$399,950​; you will ignore the ​$150,000 spent since it is a sunk cost. (Ch 6)

In a perfectly competitive market, all of the following are true except

The market supply cannot affect the retail price (Ch 6)

What is the difference between the industry demand curve for a TYPICAL GOOD and one for an INDIVIDUAL firm in the market? (assume perfect competition)

The realistic assumption that the Law od Demand holds for the good under consideration (Ch 6)

Is it possible for accounting profit to be positive and economic profit to be negative?

Yes, this could occur if explicit costs were modest & implicit costs were high

Shutdown

a short-run decision not to produce anything because of market conditions (Ch 6)

producer surplus

difference between the market price and the marginal cost curve

in a perfectly competitive market, free entry and exit cause long-run economic profits to

equal zero

constant returns to scale

exist when ATC does not change as the quantity produced changes

If it is impossible for the company to pay its​ fines, the company should

file for bankruptcy (Ch 6)

exit

long run decision to leave the market

economies of scale

occur when ATC falls as the quantity produced increases

diseconomies of scale

occurs when ATC rises as quantity produced increases


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