Econ 300 Midterm 2 - Assignment Essays

question

3 steps of producer theory

answer

1) production technology: how can inputs be turned into outputs
2) cost constraints: price of labor, price of capital
3) input choices

question

factors of production

answer

1) labor (L)
2) capital (K)

question

production function

answer

q=F(L,K)
highest output, "q" that a firm can produce for every combination of inputs

question

short run

answer

at least one input cannot be changed

question

long run

answer

all inputs can be changed

question

average product of labor

answer

total output/total input = q/L

question

marginal product of labor

answer

change q/change L
additional output produced as labor is increasing by one unit

question

isoquant

answer

a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output

question

marginal rate of technical substitution (MRTS)

answer

change in capital input/chaneg in labor input =change K/change L

question

What does the MRTS tell us about an isoquant

answer

the slope of the isoquant

question

why are isoquants bowed inward?

answer

law of diminishing returns (reduction in output will decrease capital)

question

law of diminishing returns

answer

as more workers are added, eventually marginal product and average product decline (each worker still produces positive output)

question

Where does the marginal product curve intersect the average product curve?

answer

at the peak/center of the average product curve

question

increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs

question

constant returns to scale

answer

the situation in which a firm's long-run average costs remain unchanged as it increases output

question

decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs

question

what industries have higher returns to scale

answer

increasing: manufacturing companies (need lots of equipment upfront)
decreasing/constant: service companies (more labor intensive)

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment (actual expenses)

question

economic costs

answer

explicit costs + implicit costs (includes opportunity cost)

question

user cost of capital

answer

economic depreciation + (interest rate)(value of capital)
= to the rental rate (cost to rent per time period)

question

economies of scale

answer

doubling output requires less than a doubling of cost (input proportions are variable)
Ec<1
mc<ATC

question

diseconomies of scale

answer

doubling output costs more than double
Ec>1
mc>ATC

question

perfectly competitive firm assumptions

answer

1)no barriers to entry or exit
2)many firms
3)homogeneous product
4)price takers

question

difference between MR and MC

answer

MR: additional revenue obtained from selling one more unit
MC: additional cost incurred from selling one more unit of output

question

why is MC=MR

answer

when MR is more than MC, the firms produce more as they can earn more profit, and when MR is less than MC, the firms produce less as they can incur losses. Thus, profit maximization level is where both these are equal. (slope equals 0)

question

when should a perfectly competitive firm shut down?

answer

If the market price that a perfectly competitive firm faces is below average variable cost at the profit-maximizing quantity of output

question

how are profit and producer surplus different?

answer

Producer's surplus subtracts only variable costs from revenues, while profit subtracts both variable and fixed costs. PS = TR - TVC and Profit - π-TR- TVC - TFC. Thus, producer's surplus is always greater than profit.

question

is making a zero long run economic profit a bad thing?

answer

-no, doing just as well as second best option
-competitive return on capital investment

question

constant cost industry

answer

when output increases, input prices stay the same

question

increasing cost industry

answer

when output increases, input prices increase

question

how do elasticities of supply and demand affect surplus?

answer

-when demand is more inelastic, the buyer pays a higher proportion of the tax
-when supply is more inelastic, the seller pays a higher proportion of the tax

question

what is social planners objective

answer

dislikes the policy, while consumers may like the policy

question

who does the gov. impose policies that create a dead weight loss?

answer

they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price.

question

affect of minimum wage on surplus

answer

the quantity supplied (labor) will exceed quantity demanded (employers), so there will be a surplus of labor in the market

question

market failure example

answer

when a monopolist seller sets high rates to the products leaving no choice for the buyers other than to purchase the overpriced goods

question

4 conditions for taxes to hold

answer

1) quantity sold and the buyer's price Pb must lie on the demand curve
2) quantity sold and the seller's price Ps must lie on the supply curve
3) quantity demanded must equal the quantity supplied
4) difference between the price the buyer pays and the price the seller receives must equal the tax

question

sources of monopoly power

answer

1. the elasticity of market demand
2. the number of firms in the market
3. the interaction among firms

question

rent seeking

answer

idea that firms waste time/resources trying to gain/maintain a monopoly

question

antitrust laws

answer

laws that prevent monopolies and promote competition and fairness

question

natural monopoly

answer

-can produce entire output of na market at lower cost than multiple firms
-ATC is declining over the entire relevant range of demand
-needs regulation

1 of 40

question

3 steps of producer theory

answer

1) production technology: how can inputs be turned into outputs
2) cost constraints: price of labor, price of capital
3) input choices

question

factors of production

answer

1) labor (L)
2) capital (K)

question

production function

answer

q=F(L,K)
highest output, "q" that a firm can produce for every combination of inputs

question

short run

answer

at least one input cannot be changed

question

long run

answer

all inputs can be changed

question

average product of labor

answer

total output/total input = q/L

question

marginal product of labor

answer

change q/change L
additional output produced as labor is increasing by one unit

question

isoquant

answer

a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output

question

marginal rate of technical substitution (MRTS)

answer

change in capital input/chaneg in labor input =change K/change L

question

What does the MRTS tell us about an isoquant

answer

the slope of the isoquant

question

why are isoquants bowed inward?

answer

law of diminishing returns (reduction in output will decrease capital)

question

law of diminishing returns

answer

as more workers are added, eventually marginal product and average product decline (each worker still produces positive output)

question

Where does the marginal product curve intersect the average product curve?

answer

at the peak/center of the average product curve

question

increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs

question

constant returns to scale

answer

the situation in which a firm's long-run average costs remain unchanged as it increases output

question

decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs

question

what industries have higher returns to scale

answer

increasing: manufacturing companies (need lots of equipment upfront)
decreasing/constant: service companies (more labor intensive)

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment (actual expenses)

question

economic costs

answer

explicit costs + implicit costs (includes opportunity cost)

question

user cost of capital

answer

economic depreciation + (interest rate)(value of capital)
= to the rental rate (cost to rent per time period)

question

economies of scale

answer

doubling output requires less than a doubling of cost (input proportions are variable)
Ec<1
mc<ATC

question

diseconomies of scale

answer

doubling output costs more than double
Ec>1
mc>ATC

question

perfectly competitive firm assumptions

answer

1)no barriers to entry or exit
2)many firms
3)homogeneous product
4)price takers

question

difference between MR and MC

answer

MR: additional revenue obtained from selling one more unit
MC: additional cost incurred from selling one more unit of output

question

why is MC=MR

answer

question

when should a perfectly competitive firm shut down?

answer

If the market price that a perfectly competitive firm faces is below average variable cost at the profit-maximizing quantity of output

question

how are profit and producer surplus different?

answer

question

is making a zero long run economic profit a bad thing?

answer

-no, doing just as well as second best option
-competitive return on capital investment

question

constant cost industry

answer

when output increases, input prices stay the same

question

increasing cost industry

answer

when output increases, input prices increase

question

how do elasticities of supply and demand affect surplus?

answer

-when demand is more inelastic, the buyer pays a higher proportion of the tax
-when supply is more inelastic, the seller pays a higher proportion of the tax

question

what is social planners objective

answer

dislikes the policy, while consumers may like the policy

question

who does the gov. impose policies that create a dead weight loss?

answer

they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price.

question

affect of minimum wage on surplus

answer

the quantity supplied (labor) will exceed quantity demanded (employers), so there will be a surplus of labor in the market

question

market failure example

answer

when a monopolist seller sets high rates to the products leaving no choice for the buyers other than to purchase the overpriced goods

question

4 conditions for taxes to hold

answer

question

sources of monopoly power

answer

1. the elasticity of market demand
2. the number of firms in the market
3. the interaction among firms

question

rent seeking

answer

idea that firms waste time/resources trying to gain/maintain a monopoly

question

antitrust laws

answer

laws that prevent monopolies and promote competition and fairness

question

natural monopoly

answer

-can produce entire output of na market at lower cost than multiple firms
-ATC is declining over the entire relevant range of demand
-needs regulation

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