Question 5

MUx MIJY Utility maximizing condition is: Utility maximizing condition is not: MUx = MUY

Question 7

  • MC = W/MPL

    The Connection Between Input Demand & Output Supply • In general: MC = WIMPL Notice: • To produce additional output, hire more labor. As L rises, MPL falls... • causing WIMPL to rise... • causing MC to rise. Hence, diminishing marginal product and increasing marginal cost are two sides of the same coin. THE MARKETS FOR THE FACTORS OF PRODUCTION 22

    The Connection Between Input Demand & Output Supply The competitive firm's rule for demanding labor: PxMPL=W Divide both sides by MPL: p = W/ MPL Substitute MC = WIMPL from previous slide: p = MC This is the competitive firm's rule for supplying output. Hence, input demand and output supply are two sides of the same coin. THE MARKETS FOR THE FACTORS OF PRODUCTION 23

Question 8

  • Operate if Loss < Fixed Cost

    Producing at a loss Producing at a loss Loss MC ATC AVC P = MR Fixed costs if shut down MC ATC AVC Loss

  • As demonstrated in the table, if the price is below average total cost but above average variable cost, losses are minimized by producing 50 units and incurring a loss of $3.50.

  • If the firm shut down, it would still have to pay fixed cost of five.

  • Since average variable costs at 50 units is 42 cents and the price is 45 cents, it covers the variable costs and contributes three cents on each unit toward the paying the fixed costs.

  • Three cents times 50 units is $1.50 which is the amount the firm has reduced their loss by producing instead of shutting down.

Question 9

  • In the long-run the profit for a monopolistically competitive frim is 0

    Monopolistic Competition in the Long Run Graph summary — A key idea is free entry and exit. — If the industry is profitable, other firms will enter, causing the demand for existing firms' products to decrease — If the industry is experiencing losses, firms will exit, causing demand for remaining firms' products to increase — Entry and exit will stop when profits are zero. This occurs when P = ATC.

Question 11

  • The Marginal Revenue of a firm in a perfectly competitive industry is constant

    For a perfectly competitive firm average revenue is also equal to marginal revenue. Average revenue for a perfectly competitive firm is often depicted by a horizontal average revenue curve. Average revenue is the revenue generated per unit of output sold. 01 2 S 10 Average revenue for a perfectly competitive - AmosWEB is Economics www.amosweb.com/.../awb\_nav.pl?...average%20revenue,%20perfect%20competition

Question 12

  • Cost Minimization

    • Optimal Input Mix is where MPL/Wage = MPK/Rental Rate

    • If MPL/Wage > MPK/Rental Rate, then hire the human worker

    • If MPK/Rental Rate > MPL/Wage, then the machines win! use more capital

Question 15

Excludable Non- excludable Rival in consumption Private goods Wheat • Bathroom fixtures Common resources • Clean water • Biodiversity Nonrival in consumption Artificially scarce goods • On-demand movies • Computer software Public goods • Public sanitation • National defense

Question 18

  • Price elasticity and tax share

    . Inelastic Demand thismatter.com 3. Elastic Supply 2. 4. Elastic Demand Inelastic Supply

Question 19

• • • Elastic — P increase decreases TR — P decrease increases TR Unit elastic — Price increase or decrease doesn't change total revenue. Inelastic — P increase increases TR — P decrease decreases TR o IEdl Elastic IEdl -1 Unit Elastic Edl <1 Inelastic emand Quantity Quantity

Question 24

  • P = MC --> Must be Perfectly Competitive

    Product Market Characteristics 1. Numbers of Sellers 2. Availability of Substitutes 3. Degree of Elasticity 4. Similarity of Products 5. Pricing Policy/ Strategy High value 6. Barriers to Entry/Exit 7. Efficiency/\* Rent-Seeking 8. Eco. Profits\* 9. P, MC\* 10. p MR Many (they are pricetakers from the market). One product type available (fully substitutable) available from atl sellers. Perfectly elastic. Homogeneous products from all sellers. No pricing policy or strategy. Price at market price, price- takers. No barriers to entry/exit. Efficient. Each seller prices at cost. No rents. Only transfer earnings. Zero economic profits. Price = Minimum AC. Ideal sociai pricing P = MC p = MR Fewer than perfect competition, more than oligopoly/ monopoly (some price-makers). Imperfect substitutions. Imperfect elasticity. Depends on degree of innovation. Heterogeneous. Mostly non-price competition; some independent pricing. Weak barriers to entry/exit. Inefficiency, excess capacity since P = AC (but not at minimum). p = AC; tendency for LR zero economic profits. P \> MC idop\&ly Few sellers who have some control of market share; interdependence. Fewer substitutes available = market pricing power. Varies. Greater elasticity at high prices. Lower elasticity at lower prices. Some markets— homogeneous for specialty products. Other markets heterogeneous products. Much interdepen- dence in pricing. Some evidence of monopoly pricing • poli Formidable barriers to entry/exit. Monopoly pricing power leads to waste/inefficiency. Some economies of scale. Tendency for existence of LR economic profits, p \> MC One seller for whom there are no close substitutes. No close substitutes available. Generally inelastic but still elastic at higher prices. FolEows from \#1—3 above. Heterogeneous since there are no close substitutes. Monopoly pricing power. High value to ratio: P-MC Complete barriers to entry by definition. Dead-weight loss of monop- oly (loss to society beyond monopoly profits and reduced consumer surplus). Empirical evi- dence of LR economic profits. P \> MC Long run tendencies at equilibrium.

Question 26

  • The Effect of an Increase in Demand

    • An increase in the demand for a product causes the equilibrium price and quantity to increase in the market.

    • An increase in demand raises price and profit, which causes more suppliers to enter the market

    • Higher industry output from new entrants drives price and profit back down to its original equilibrium

    (a) Existing Firm Response to Price, cost $18 14 Price (b) Short-Run and Long-Run Market Response to Increase in Demand Long-run industry supply curve, LRS (c) Existing Firm Response to Increase in Demand An increase in demand rmses pnce and profit. x Price, cost New Entrants Higher industry output from new entrants dhves price and profit back down. MC ATC Quantity MKT MKT QxQr •ZMkT D Qz Quantity MC ATC Quantity Increase in output from new entrants Panel (b) shows how an industry adjusts in the short and long run to an increase in demand; panels (a) and (c) show the corresponding adjustments by an existing firm. Initially the market is at point XMKT in panel (b), a short-run and long-run equilibrium at a price of $14 and industry output of Qx. An existing firm makes zero economic profit, operating at point X in panel (a) at minimum average total cost. Demand increases as DI shifts rightward to D2 in panel (b), raising the market price to $18. Existing firms increase their output, and industry output moves along the short-run industry supply curve Sl to a short-run equilibrium at YMKT. Correspondingly, the existing firm in panel (a) moves from point X to point Y. But at a price of $18 existing firms are profitable. As shown in panel (b), in the long run new entrants arrive and the short-run industry supply curve shifts rightward, from Sl to S2. There is a new equilibrium at point ZMKT, at a lower price of $14 and higher industry output of Qz. An existing firm responds by moving from Y to Z in panel (c), returning to its initial output level and zero economic profit. Production by new entrants accounts for the total increase in industry output, Qz— Qx. Like XMKT, ZMKTis also a short-run and long-run equilibrium: with existing firms earning zero economic profit, there is no incentive for any firms to enter or exit the industry. The horizontal line passing through XMKT and ZMKT, LRS, is the long-run industry supply curve: at the break-even price of $14, producers will produce any amount that consumers demand in the long run.

Question 28

28. Assume that both the product and labor markets are perfectly competitive. It would be profitable for a firm to hire additional labor if the ratio of the wage to the marginal product of labor is (B) (C) (D) (E) less than the ou ut •ce less than the marginal cost greater than the output price greater than the marginal cost equal to the output price

Question 37

  • For a monopolistically competitive profit-maximizing firm, AR = P

    Short Run Equilibrium with Monopolistic Competition PI is the profit maximising price and QI is the equilibrium output Price, Cost MC AC AR Output

Question 38

  • The short-run supply curve for a firm in a perfectly competitive industry is its marginal cost curve above the minimum point of its average variable cost curve

  • In the short run the firm needs only to cover its variable costs (at Q1 below) – this is largely because covering variable cost ensures than an output can be produced in the future - if variable costs cannot be covered then no further output can be made.

  • In addition, fixed costs have already been paid for prior to any marginal decision to supply, so do not enter into the firm’s short run calculations.

    Marginal Costs Average Total Costs Variable

Question 44

Progressive Proportional egressive Tax Base (Income)

Question 49

![[rnp3Ct ofa fill in the price of good X Nanue o f Good X Normal Good inferior Good Giffen Good Substitution t ion of Change) in quantity demanded of Good X Increase in quantity demanded of Good X in quantity demanded of Good X Inco me E # s titufrn & Imome (Direc lion of Change) (Bdagritude of Change) Inciease in quantity demanded o? Good X Decrease in guaMity demanded of Good X Decrease in quartity demanded of Good X SE Price P ogitive F o gifve Ne ga tivs ](./media/image300.png)

SL Wage Rate Income effect \> Su bstitution effect WI Substitution effect \> Income effect wv.w.econonucshelp.org Q Labour Hours worked

Question 51

  • A profit-maximizing monopolist selects its output level in the elastic region of its demand curve.

    $200 150 ä 200 A Monopolist will 50 always operate on the Elastic Portion 0 of the Demand $750 Curve 500 250 MONOPOLY REVENUES & C 56 7 8 9 10 Elastic Inelastic STS Inelastic Portion MR is 11 12 13 14 15 16 17 1B 12 13 14 15 16 17 18

Question 56

Derived Demand The demand for a good is derived from the demand for the good it produces. Steel Supply Demand Cars Supply emand

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