ECON323 Exam #2

inputs into the production process

- labor, capital & materials

amount of time needed to make all production inputs variable

FORMULA: F(L)/L

- output/labor input

output per unit of a particular input

FORMULA: derivative of the average product of labor - (change in output)/(change in labor input)

- delta F(L)/ delta L

additional output produced as an input is increased by one unit

C. L1;L2

- when comparing the slope of F at L1 and L2. The slope at L1 is steeper, so MP is higher at L1.

when other inputs are fixed, as the use of an input increases, the resulting additional output will eventually decrease; applies to short run

C; Need to observe if the slope of the total product curve is eventually decreasing

a curve showing all possible combinations of inputs that yield the same output

- mathematically, an isoquant is all combinations (L,K) such that F(L,K) = q

economic: The maximal amount of input (K) that can be reduced when one extra unit of another input (L) is used, so that output remains constant.

Graphical: absolute value of the slope of an isoquant

the isoquants are smooth curves that bend in towards the origin

- the production function satisfies the assumption of diminishing MRTS

- when more and more labor and less and less capital are used in production, it is more and more difficult to use additional labor to replace capital

- perfect substitutes in production (perfectly linear lines)

- perfect complements in production (right angles)

situation in which output more than doubles when all inputs are doubled; allows specialization

F(2L,2K) > 2F(L,K)

situation in which output less than doubles when all inputs are doubled; difficulties in managing effective communication

F(2L,2K) < 2F(L,K)

C(q) = 10 + 4q^2

C(q) = FC(q) + VC(q)

cost of fix input. Does not vary

ex: FC(q) = 10

cost on variable input. Varies when output level changes, VC(q)

ex: VC(q) = 4q^2

AFC(q) = FC(q)/q

ex: AFC(q) = 10/q

VC(q)/q

ex: AC(q) = (10+4q^2)/q = 10/q + 4q = AFC(q) + AVC(q)

the rate at which total cost changes when output level changes; the incremental cost when output increases by 1

ex: MC(q) = C'(q)

C(q) = rK (K = fixed) + wL(q)

- r = rental rate

- rK = cost spent on capital

- wL(q) = cost spent on labor

in the long run, both K (price r) and L (price w) are variable inputs

step 1: find the cost minimizing input bundle to produce q

step 2: take into account prices and compute cost

step 1: MRTS = w/r (isoquant is tangent to isocost)

step 2: F(L,K) = q (can produce q unit of output)

no, more inputs in the long run makes the choice of input more flexible

products of all firms in a market are identical - no firm can raise the price of its product without losing all of its business

a firm has no influence over market price and thus takes the price as given

downward sloping

R(q) = pq

- each firm is a price-taker, so market price p is fixed

revenue - total cost

pi (q) = R(q) - C(q)

the rate at which revenue changes when the output changes

MR(q) = R'(q); the slope of R(q)

MR(q) = p

the rate at which profit changes when the output changes

pi'(q) = R'(q) - C'(q)

Marginal Revenue - Marginal Cost

produces a positive amount of output, but suffers from loss

- in the short run, the fixed cost always exists even if no production

this happens when p is between the minimum levels of AC and AVC

there is a profit; when p is higher than the minimum level of AC

the firm's profit-maximizing output level under each market price

- the part of the MC that is weakly above AVC

the supply curve shifts up

1) increase/decrease of the price of the variable input -> shifts supply curve up/down

2) technology advancements that decreases marginal cost -> shift supply curve down

the sum of all individual firm's short run supply curves under each price level

Q(p*) = S(p*); Q and S are market demand and market supply curves

- p* is the equilibrium price

the net benefit of all producers

Graphically, the producer surplus for a market is the area below the market price and above the market supply curve, between 0 and output Q*.

the price of a good has been regulated to be no higher than Pmax, which is below the market-clearing price P0

the price of a good has been regulated to be no lower than P2, which is above the market-clearing price P0

the demand curve facing a seller is flat (perfectly elastic)

a competitive firm's marginal revenue is equal to the market price

MR=P

- As a monopolist is the sole producer of a product, the demand curve that it faces is the market demand curve, which is downward sloping.

- In this case, a monopolist’s marginal revenue is below the price level.

choose to sell its output at any point on the downward sloping market demand curve

- charges a higher price than competitive price level,• charges a price higher than marginal cost

- produces less than competitive equilibrium output level

- earns a profit that is higher than the competitive profit level

-leads to a deadweight loss.

charge each consumer his/her willingness to pay/evaluation of the good or service

- the output level becomes efficient, although consumers have no surplus at all

- First-degree price discrimination is usually difficult to find in real life, because it is difficult for the monopolist to know each consumer’s willingness to pay.

- personalize discount for cars

- personalized pricing/discounts for tax services

Examples of quantity discount (second-degree price discrimination) :

- Buy one get one 50% off offer

- Loyalty cards

- Family size snack is usually cheaper

- Group discount

- Hotel rates: weekends vs weekdays

- Economy class and business class

- Coupons

- Pink tax (gender-based price discrimination)• Regular rate vs student rate