Question 7

Marginal Cost Average Total Cost Average Variable QUANTITY

7. If marginal revenue is equal to PI, all of the following statements are u•ue EXCEPT: (A) Total revenue will equal total costs. (B) The firm will produce QI units of output. (C) The firm will produce the effcient level of output. (D) The firm will eam a normal fit. (E) The firm will increase production in the I run.

  • A firm will always produce where MR = MC, therefore the firm will produce Q1 units of output.

  • The firm will produce the efficient level of output since it is producing where P = MC = minimum ATC.

  • The firm is achieving both allocative and productive efficiency.

  • The firm will earn a normal profit (0 economic profit) since P = ATC.

  • This also tells us that total revenue equals total costs when the firm produces Q1 units of output.

  • The firm will not increase production in the long run since it is already in equilibrium.

Question 10

  • For a monopolist at the profit-maximizing output level, the demand curve will not intersect the supply curve

    PRICE COST REVENUE A Monopoly Qmax MC Remember earlier in this course we learned that the MC curve represented the supply curve for a firm ? QUANTITY MR Recall also that the MC curve is the supply curve above breakeven. You can hopefully see that in this market (if a Monopoly did not exist) our expected equilibrium is where SUPPLY + DEMAND (the green lines, remember Level 1 eco?)

Question 17

Joint production without trade Robinson

  • PPC per hour of time Gains from trade 1 -ego 2 Joint production with specialization 3 4 5 6 Fish

  • Trade is one way for a country to expand its PPC curve since specialization through trade allows for greater efficiency.

  • Other than trade, a country would have to discover a new supply of resources or technological advancement to shift its current PPC curve.

Question 21

21. The demand curve for a normal good slopes down for which of the following reasons? I. An increase in the price of the good induces to purchase substitute Il. An increase in tlr price of the good reduces hasing power. Ill. An increase m price g urreases consumers' utility from consunüng that good.

  • As the price of a good increases, consumers are going to turn to substitutes because the higher price reduces the consumers’ purchasing power.

Question 25

  • A firm should always produce where MR = MC.

  • In this situation, the firm is currently producing where MR < MC since $12 < $16.

  • The firm should decrease output until its MC = $12 and it should keep producing because at that price, P > AVC since $12 > $8.

    25. In a perfectly competitive indusuy, the market price of the product is $12. A firm produces at a level of output '\*drre average total cost is $16, marginal cost is $16. and average variable cost is $8. To maximize its profit, tlr firm should (A) decrease its selling price increase its sellin (C) decrease output but ut wn (E) leave both price and output unchanged

  • Breakeven vs. Shut down

    Breakeven point This is the point where price is equal to average cost or P=AC At this price the firm is covering all of its economic costs (recall this is accounting cost plus opportunity cost) • In economics when a firm is at a breakeven point it is said to be earning a normal profit.

    Shutdown point • Recall that Total Cost + VC • If a firm can't even receive a price to cover the VC of producing a good then it should shutdown. • In this case though it will still have to pay its fixed costs At any price point between shutdown (above AVC) and breakeven at least the firm will receive a contribution to cover FC so it will continue to operate. SHUTDOWN is where P = AVC

  • Long-run (Profitability)

    Profitability condition (minimum ATC = break-even price) P \> minimum ATC P = minimum ATC P < minimum ATC Result Firm profitable. Entry into industry in the long run. Firm breaks even. No entry into or exit from industry in the long run. Firm unprofitable. Exit from industry in the long run.

  • Short-run (Production)

    Production condition (minimum AVC = shut-down price) P \> minimum AVC P = minimum AVC P < minimum AVC Result Firm produces in the short run. If P < minimum ATC, firm covers variable cost and some but not all of fixed cost. If P \> minimum ATC, firm covers all variable cost and fixed cost. Firm indifferent between producing in the short run or not. Just covers variable cost. Firm shuts down in the short run. Does not cover variable cost.

Question 29

  • Economic rent is a surplus payment.

  • If supply is perfectly elastic, there will never be any economic rent.

u Economic rent 1 acre Quantity of land in parcel The price of a one-acre parcel of land is determined by the intersection of a vertical supply curve and the demand curve for the parcel. The sum paid for the parcel, shown by the shaded area, is economic rent.

The supply of land is a vertical line. The quantity of land in a particular location is fixed. Suppose, for example, that the price of a one-acre parcel of land is zero. At a price of zero, there is still one acre of land; quantity is unaffected by price. If the price were to rise, there would still be only one acre in the parcel. That means that the price of the parcel exceeds the minimum price—zero—at which the land would be available. The amount by which any price exceeds the minimum price necessary to make a resource available is called economic rent. The concept of economic rent can be applied to any factor of production that is in fixed supply above a certain price. In this sense, much of the salary received by Judge Judy constitutes economic rent. At a low enough salary, she might choose to leave the television industry. How low would depend on what she could earn in a best alternative occupation. If she earns $45 million per year now but could earn $200,000 in a best alternative occupation, then $44.8 million of her salary is economic rent. Most of her current earnings are in the form of economic rent, because her salary substantially exceeds the minimum price necessary to keep her supplying her resources to current purposes.

  • Economic Rent and Opportunity Cost

    Economic Rent and Opportunity Cost w General case Economi rent p ortunity cost c Rock singers (concerts) Inc Il economic ren s Economic rent Land (acres) All opportunity cost w Opportunity : cost s Low-skilled labor (hours) TM

Question 43

revoke /re'vök/ 1. put an end to the validity or operation of (a decree, decision, or promise). •the men appealed and the sentence was revoked' synonyms: cancel, repeal, rescind, reverse, annul, nullify, void, invalidate, countermand, retract, withdraw, overrule, override; More 2. (in bridge, whist, and other card games) fail to follow suit despite being able to do so. Translations, word origin, and more definitions

Question 44

44. For a certain firm, the marginal revenue product for the last unit of labor is $60, and the marginal revenue product for the last unit of capital is $ 100. Which of the following combinations of factor prices would be necessary the firm to maximize profits? (A) (B) (E) $2 $3 $10 $2 $60 price QfCapital s 20 $ 10 $ 25 $100

  • The profit-maximizing rule states that the MRP/P of each resource unit must equal 1.

  • In order for that to occur, the price of labor must be $60 and the price of capital must be $100 so that each ratio is equal to 1.

Question 60

60. Private supply of public goods is most likely to result in A) less than the efficient level of output, due to the free-rider Iroblem tent ev output, to the problem of insufficient competition (C) more than the emcient level of output, to lower costs of private firms (D) more than the efficient level of output, due to the existence of extemalities (E) an overuse of these goods

  • Remember, one of the main reasons why we have public goods is due to the free-rider problem.

  • When you can’t exclude everyone from using a good or paying for its benefits, less than the efficient level will be provided if a private firm is producing that good simply because they need to cover their costs.

  • A privately produced good may provide additional benefits to others who aren’t paying for the good, yet since the firm doesn’t reap those benefits, they choose to produce less than the efficient amount.

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