question

To maximize profits, a firm must produce as efficiently as possible. A firm engages in efficient production if:

answer

It cannot produce its current level of output with fewer inputs, it is maximizing profit, given the quantity inputs, cannot produce more output. This level of production is also known as technological efficiency

question

Consider Boeing (a producer of jet aircraft), General Mills (a producer of breakfast cereals), and Wacky Jack's (which claims to be the largest U.S. provider of singing telegrams). For which of these firms is the short-run the longest period of time? For which is the long-run the shortest? Explain

answer

Boeing has the longest short-run because aircraft production requires large, specialized machines. The long-run is the shortest for Wacky Jack's because providing singing telegrams requires primarily labor.

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Longer short runs result from...

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Needing more specialized resources and thus capital

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Shorter long runs result from...

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Needing mainly labor

question

If q= Z, L = X, K = Y is a point on the production function ,where Z,X,Y are all quantities; can q= Z, L= X, K= P and Y < P also be a point on the production function?

answer

No, since we assume production functions are efficient, if I produce Z units with K=Y and L=X, I should produce more with K=P since K<P

question

Given a cobb-douglas function Q=K^(.5)L^(.5) and a set L and Q, how do you find the production for the isoquant when Q= 1000

answer

Replace Q with 1000 so set 1000=K^(.5)L^(.5), solve for K

question

Finding when the Marginal Product of Labor is positive

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Find the MPL and set it equal to zero, solve for L to find where it shifts, then plug in that number to see where its positive

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Finding when there are diminishing marginal returns

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take the derivative of the MPL with respect to L and set it equal to zero, then solve for L, then plug in that number to see where its negative and thats when it will decrease

question

What is the difference b/w an isoquant and an indifference curve?

answer

An indifference curve shows all combinations of goods that result in the same level of utility; an isoquant shows all the combinations of inputs that result in a given level of output. The numbers attached to each isoquant are cardinal. However, in the case of the indifference curves they are ordinal

question

Which of the following statements best summarizes the law of diminishing marginal returns?

answer

In the short run, as more labor is hired, output increases at a diminishing rate

question

Perfect Substitutes Graph

answer

Straight, linear line

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Imperfect Substitute Graph

answer

See Graph

question

For MRTS, MPx (whatevers on the x-axis) goes ____

answer

In the numerator

question

If the MRTS of hours studying marginal analysis problems (A) for hours studying supply-and-demand problems (R) is -3 A/R, this means

answer

3 hours of studying marginal analysis problems per hour studying supply-and-demand problems

question

Is it possible to have different marginal productivity functions but the same MRTS functions?

answer

Yes, A^(.72) times R^(1.28) and A^(.36) times R^(.64) are different marginal productivity functions but give the same MRTS function

question

Michelle's business produces ceramic cups using labor, clay, and a kiln. She can manufacture 25 cups a day with one worker and 35 with two workers. Does her production process necessarily illustrate decreasing returns to scale or diminishing marginal product of labor? What is the likely explanation for why output doesn't increase proportionately with the number of workers?

answer

The first worker increases output by 25 and the second by 10. That is, the marginal productivity of the first worker is 25, and the marginal productivity of the second worker is 10. This is an illustration of diminishing marginal product of labor. This diminishing return to extra labor may be due to too many workers sharing too few machines or to crowding.

question

Firm 1 and Firm 2 use the same type of production function, but Firm 1 is only 90% as productive as Firm 2. That is, the production function of Firm 2 is q2 = f(L, K) and the production function of Firm 1 is q1 = 0.9f(L, K). At a particular level of inputs, how does the marginal product of labor differ between the firms?

answer

The marginal product of labor of Firm 1 is only 90% of the marginal product of labor of Firm 2 for a particular level of inputs.

question

If the average product of labor is higher for Firm 1 than for Firm 2, must Firm 1 be more productive in the sense that it can produce more output from a given amount of inputs? Why?

answer

We do not have enough information to determine which company is more productive, as Firm 1 may use more capital input than Firm 2. If that is the case, it is possible that with the same capital/labor mix as Firm 2, Firm 1 would produce less than Firm 2

question

Which graph corresponds to each case?

a) ) At Joey's Lawncutting Service, a lawn mower cannot cut grass without a laborer. A laborer cannot cut grass without a lawn mower. Which graph in the above figure best represents the isoquants for Joey's Lawncutting Service when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

b) The production function for hamburgers can be written as q = 0.1X + 0.1Y, where X is Canadian ground beef and Y is U.S. beef, both measured in pounds. Which graph in the figure best represents the isoquants for the hamburger production when U.S. ground beef is on the vertical axis and Canadian ground beef is on the horizontal axis?

a) ) At Joey's Lawncutting Service, a lawn mower cannot cut grass without a laborer. A laborer cannot cut grass without a lawn mower. Which graph in the above figure best represents the isoquants for Joey's Lawncutting Service when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

b) The production function for hamburgers can be written as q = 0.1X + 0.1Y, where X is Canadian ground beef and Y is U.S. beef, both measured in pounds. Which graph in the figure best represents the isoquants for the hamburger production when U.S. ground beef is on the vertical axis and Canadian ground beef is on the horizontal axis?

answer

a) A

b) C

b) C

question

See Image

answer

see image

question

A company has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

answer

$0

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Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is

answer

$45,000

question

Finding the short-run production function given q=L^(x) times K^(y)

answer

Plug in whichever is fixed, whether thats capital or labor, and find q=..., then solve for L to find what L(q) =

question

Finding the short run variable cost function

answer

VC(q)= wage times L(q)

question

Finding the short-run marginal cost function

answer

Take the derivative w/ respect to q of the total cost function

question

Price of capital in the short run is usually used to find ___

answer

the fixed cost, by mutiplying the price of capital by the level of capital

question

You have a ticket to go to a concert by one of your favorite groups, the Hives, which you cannot resell. However, you can buy a ticket for $35 to attend a talk by Steven Colbert, at the same time as the concert. You are willing to pay up to $130 to hear Colbert. Given that there are no other costs involved in attending either event, what is your opportunity cost of attending the Hives concert?

answer

130-35 = $95

question

A firm purchased copper pipes a few years ago at $8 per pipe and stored them, using them only as the need arises. The firm could sell its remaining pipes in the market at the current price of $4. What is the opportunity cost of each pipe and what is the sunk cost? The opportunity cost is $____ and the sunk cost is $_____ .

answer

The opportunity cost is $4 and the sunk cost is $4. A sunk cost is a cost that cannot be recovered. We can recover $4 of the total $8 cost, and so the sunk cost is $8 - $4 = $4.

question

What is the principle distinction between explicit costs and implicit costs?

answer

Explicit costs are direct, out-of-pocket payments, while implicit costs are all foregone opportunity costs

question

The only variable input a janitorial service firm uses to clean offices is workers who are paid a wage, w, of $6 an hour. Each worker can clean four offices in an hour. Use math to determine the production function, the variable cost, the average variable cost, and the marginal cost. Plot the VC, the AVC and the MC

answer

Production Function: q=4L

C=VC = 6 times q/4 (q/4=L) = 1.5q

AC=AVC = 1.5

MC= 1.5

C=VC = 6 times q/4 (q/4=L) = 1.5q

AC=AVC = 1.5

MC= 1.5

question

If a firm buys a building so as to have office space for its workers, what is the monthly opportunity cost of the building?

answer

The rent the firm could earn if it rented the building to another firm

question

Isocost Equation

answer

C = wL + rK, then pick a C to be held constant, along with a wage (w), and price of capital (r)

question

Finding the conditional labor demand

answer

Find the tangency condition (MRTS = -w/r) to find one of K, then plug that into the production function to find L, then use L to find K.

question

Finding the long run cost function

answer

Using the conditional labor and conditional capital demands, plug those into C(q)=wL + rK, then use w and R to find C(q) = Xq, where X is a number

question

Finding how much labor should be used to minimize costs given K

answer

Find tangency condition, -w/r = -MPL/MPk, then solve for L by plugging in K

question

Finding the ratio of prices

answer

w/r

question

Finding Labor and Capital to produce Q units

answer

find tangency condition, then plug that into the initial production function, solve for L and K (even if it requires going back to the tangency condition for one of them)

question

If MPk/r < MPL/w then...

answer

The cost of production is not being minimized and the firm should use more labor (L), and less capital (K)

question

What is the effect of a lump-sum franchise tax T on the firm's short run AC curve? What is the effect on the short run MC curve? Consider that the SR AC curve before tax is U-shaped

answer

A lump-sum franchise tax will increase the FC and therefore it will affect the AC and AFC. I won't affect neither the MC nor the VC. The graph below shows the AC before and after the tax and the MC. The MC does not vary.

question

What is the long run cosr function of things that are perfect complements/fixed proportions

answer

q=min(L,K), at the corner L=K=q, so the LR cost function is C=wq + rq = (w+r) times q

question

Finding which functions will change from a tax per unit of production

answer

Add the tax to the AVC(q), AC(q), and MC, those are the functions that will change

question

Finding the best technology for a firm

answer

Find the conditional labor and capital demands, since you need to find optimal tech and minimized costs

question

If both the price of labor and capital rise in the same proportion, which of the following will occur (holding production costs constant)?

answer

The isocost line makes a parallel shift inward

question

The long run average cost curve may initially slope downward due to

answer

Economies of scale

question

The production of cigarettes is highly automated; the production function shows increasing returns to scale. Then the average cost function shows:

answer

Economies of scale

question

What does the long-run expansion path show?

answer

It shows combinations of capital and labor that minimize the cost of producing any level of production while input prices are kept constant.

question

Explain the following statement: the long run average cost curve envelops the short run average cost curves.

answer

The long run cost is always lower or equal to the short run cost. The long run average cost is always lower or equal to the short run average cost. Therefore, long run average cost curve envelopes the short run average cost curves

question

In the short-run, the expansion path is

answer

Horizontal

question

Fixed proportions production function if it takes 4 units of labor and 2 units of capital to produce one unit of output. What is the cost function C(q)? What type of economies of scale does the function show?

answer

q=min(1/2K, 1/4L)

C(q) = (4w + 2r) times q

It shows no economies of scale

C(q) = (4w + 2r) times q

It shows no economies of scale

question

If a firm manufactures in its home country, it faces input prices for labor and capital of w and r and produces q units of output using L units of labor and K units of capital. Abroad, the wage and the cost of capital are half as much as at home. If the firm manufactures abroad, will it change the amount of labor and capital it uses to produce q? Determine whether the change in factor prices affects the isoquant or the isocost lines. The change in factor prices will....

The change in factor prices will...

The change in factor prices will...

answer

Not affect the isoquants b/c the production function hasn't changed. ; not affect the slope of the isocost lines because relative prices are unchanged

question

According to Haskel and Sadun (2009), the United Kingdom started regulating the size of grocery stores in the early 1990s, and today, the average size of a typical UK grocery store is roughly half the size of a typical U.S. store and two-thirds the size of a typical French store. What implications would such a restriction on size have on a store's average costs.

answer

Since grocery stores in the UK are smaller, their long-run average cost of production is lower if there are diseconomics of scale.

question

...

answer

...