question

Use the following production function to answer the next four questions: 10KL + 2K2L2 - 0.1K3L3. The firm currently has K fixed at K=2 and cannot adjust that in the short run.

1. What is the short run production function?

2. If the firm sets L=2, how much will be produced?

3.If the firm sets L=2, what is the marginal product of labor?

4.If the firm sets L=2, what is the average product of labor?

1. What is the short run production function?

2. If the firm sets L=2, how much will be produced?

3.If the firm sets L=2, what is the marginal product of labor?

4.If the firm sets L=2, what is the average product of labor?

answer

1. Q = 10(2)L + 2(4)L2 - 0.1(8)L3 > 20L + 8L2 - 0.8L3

2. When L=2 as well then Q = 20(2) + 8(4) - 0.8(8) = 40 + 32 - 6.4 = 65.6

3. The marginal product of labor is the derivative, so MPL = 20 + 16L + 2.4L2

And when L=2 this is MPL = 20 + 16(2) - 2.4(4) = 20 + 32 - 9.6 = 42.4

4. Average product of labor is just the total product divided by the amount of labor (giving output per unit of labor). When L=2 this is 65.6/2 = 32.8

2. When L=2 as well then Q = 20(2) + 8(4) - 0.8(8) = 40 + 32 - 6.4 = 65.6

3. The marginal product of labor is the derivative, so MPL = 20 + 16L + 2.4L2

And when L=2 this is MPL = 20 + 16(2) - 2.4(4) = 20 + 32 - 9.6 = 42.4

4. Average product of labor is just the total product divided by the amount of labor (giving output per unit of labor). When L=2 this is 65.6/2 = 32.8

question

A product function

answer

gives the amount that a firm can produce given various combinations of inputs.

question

You have been hired to replace the manager of a firm that used only two inputs, capital and labor, to produce output. The firm can hire as much labor as it wants at a wage of $10 per hour and can rent as much capital as it wants at a price of $50 per hour. After you look at the company books, you learn that the company has been using capital and labor in amounts that imply a marginal product of labor of 50 (per hour) and a marginal product of capital of 100 (per hour). How would you adjust inputs to hit the current target production level?

answer

Decrease the use of capital and increase the use of labor.

question

For the next three questions, consider a firm that sells its product in a perfectly competitive market with a price of $50. Your firm's cost function is C = 40 + 5Q2.

1.The profit-maximizing output for the firm is:

2.The firm's maximum profits are:

3.What will happen in the long run if there is no change in the industry demand curve?

1.The profit-maximizing output for the firm is:

2.The firm's maximum profits are:

3.What will happen in the long run if there is no change in the industry demand curve?

answer

1. 50 = 10Q

Q = 5

2.P = 50, Q = 5 so

Profit = revenue - cost = P*Q - cost = 50(5) - (40 + 5(25)) = 250 - 165 = 85

3. Some firms will enter the market eventually

Q = 5

2.P = 50, Q = 5 so

Profit = revenue - cost = P*Q - cost = 50(5) - (40 + 5(25)) = 250 - 165 = 85

3. Some firms will enter the market eventually

question

For the next three questions, consider that you are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q. Your costs are C = 5 + 30Q.

1.The profit-maximizing output for your firm is:

2.The profit-maximizing price is:

3.Your firm's maximum profits are:

1.The profit-maximizing output for your firm is:

2.The profit-maximizing price is:

3.Your firm's maximum profits are:

answer

1. 230 - 40Q = 30

200 = 40Q

Q = 5

2. Q = 5, P = 230 - 20(5) = 130

3. Profit = revenue - cost = P*Q - cost = 130(5) - (5 + 30(5)) = 650 - 155 = 495

200 = 40Q

Q = 5

2. Q = 5, P = 230 - 20(5) = 130

3. Profit = revenue - cost = P*Q - cost = 130(5) - (5 + 30(5)) = 650 - 155 = 495

question

Which of the following market structures would you expect to yield the greatest product variety?

answer

Monopolistic competition

question

Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets?

answer

There is free entry and long-run profits are zero.

question

T/F In the long run, profits in monopolistic competition head toward zero as the price in monopolistic competition heads to the minimum of the average cost curve.

answer

False -Profits head toward zero but price stays above the minimum average cost since firms have some pricing power; the equilibrium will have the firm demand tangent to the AC curve, but with a downward sloping demand curve that will not be at the minimum of the AC curve.

question

Adjusted R-squared is a preferred measure of regression fit over R-squared because R-squares is biased upwards and will not decrease with the addition of any variable no matter how irrelevant.

answer

True

question

Use the following information to answer the remaining questions. Bill sells ice cream from a cart at local events. He figures the three key factor in how many ice cream cones he sells is the price of a scoop of ice cream (Pic), the price of a competing snow cone (Psc), the price of a funnel cake (Pfc) and the temperature in Fahrenheit (T). He collects data from 30 events and then estimates a linear demand function. The result is:

1. Considering the factors Bill thinks influence his demand (price of ice cream, price of snow cone, price of funnel cake, temperature), which of these are statistically significant?

2. As indicated by the adjusted R-square

3. The p-value on the coefficient for the price of snow cones

4. The estimated demand suggest that for every one degree increase in temperature,

1. Considering the factors Bill thinks influence his demand (price of ice cream, price of snow cone, price of funnel cake, temperature), which of these are statistically significant?

2. As indicated by the adjusted R-square

3. The p-value on the coefficient for the price of snow cones

4. The estimated demand suggest that for every one degree increase in temperature,

answer

1. All of them except the funnel cake

2. the model explains 59% of the variation in observed consumption data.

3. indicates there is a 0.8% chance the true coefficient is zero.

4.Bill sells 0.43 more ice cream cones

2. the model explains 59% of the variation in observed consumption data.

3. indicates there is a 0.8% chance the true coefficient is zero.

4.Bill sells 0.43 more ice cream cones

question

Law of diminishing returns

answer

For a given amount of fixed input, as you add more of the variable product input, the marginal product eventually declines/diminishes

question

Economies of scale

answer

Gets bigger by producing more of the same good/average costs fall as you increase production of a single good

- Specialization:method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency

- Spreading fixed costs

- Buying clout

- Becoming cost effective to adopt different technologies

- Specialization:method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency

- Spreading fixed costs

- Buying clout

- Becoming cost effective to adopt different technologies

question

Economies of scope

answer

Get bigger by producing more of different goods

- Average costs fall as expand production by producing additional different kinds of goods

- Average costs fall as expand production by producing additional different kinds of goods

question

Learning curve

answer

Get better by doing it, more efficient which decreases AC

- When production now will decrease average cost nect time

- When production now will decrease average cost nect time

question

Minimum efficient scale

answer

The smallest quanityt where the long run ATC hits its minimum

- A small MEX relative to total market output suggests you'd see many small firms producing small amounts

- A large MES relative to total market output would . suggest just a few firms producing

- A small MEX relative to total market output suggests you'd see many small firms producing small amounts

- A large MES relative to total market output would . suggest just a few firms producing

question

Shutting down

answer

Choose to produce Q=0 in short run

question

Exiting

answer

Choose to produce Q=0 in long run

question

Perfect competition

answer

- Many buyers/sellers

- Homogeneous product

- Perfect info

- No transaction costs

- Free entry/exit

- Price taker

- Profits move towards zero

- Homogeneous product

- Perfect info

- No transaction costs

- Free entry/exit

- Price taker

- Profits move towards zero

question

Monopolistic competition

answer

- Many buyers and sellers

- Heterogenous product

- Free entry & exit

- Heterogenous product

- Free entry & exit

question

Oligopoly

answer

Few firms dominate market

question

Implications of price taker

answer

1. Firms are price taker

2. Firm has constant MR=P

3. Individual firm has horizontal demand @P

4. LR profits move to zero economic profit (implication of free entry/exit)

5. LR price moves to min AC . (Just combines MR=P with R=0)

6. Total surplus for markets is maximized (because competitive market is efficient)

2. Firm has constant MR=P

3. Individual firm has horizontal demand @P

4. LR profits move to zero economic profit (implication of free entry/exit)

5. LR price moves to min AC . (Just combines MR=P with R=0)

6. Total surplus for markets is maximized (because competitive market is efficient)

question

Pros and cons of Monopoly

answer

Pros; - Cheaper to have 1 firms - Lower AC

- Patents

Cons: - Less TS for entire market - Lower production - No threat of entrants leads to lack of motivation to innovate . - Higher prices - Reduces CS - Generates DWL

- Patents

Cons: - Less TS for entire market - Lower production - No threat of entrants leads to lack of motivation to innovate . - Higher prices - Reduces CS - Generates DWL

question

Natural monopoly

answer

A situation where there are economies of scale or scope that one firm can supply the entire market demand at a lower cost than several firms

question

Sources of monopoly power

answer

Patents

Gov granted monopoly positions (energy)

Economies of scale and scope

Monopolizing resources

Gov granted monopoly positions (energy)

Economies of scale and scope

Monopolizing resources