ECON 1 Chapter 70-75: Entry and Exit

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.


Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

Question 16

1. If price is cut and demand is elastic, total revenue will rise because

   		the change in quantity demanded is greater than the percent change in price.
   		the percent change in quantity demanded is greater than the change in price.
   		the percent change in quantity demanded is greater than the percent change in price.
   		customers can't find substitutes.

3 points

Question 17

1. If price is cut and demand is inelastic, total revenue will fall because

   		the change in quantity demanded is less than the percent change in price.
   		the percent change in quantity demanded is less than the change in price.
   		the percent change in quantity demanded is less than the percent change in price.
   		customers can find substitutes.

3 points

Question 18

1. If something is addictive, then

   		price and demand are inversely related.
   		price elasticity of demand is equal to one.
   		demand is perfectly inelastic.
   		demand is perfectly elastic.

3 points

Question 19

1. In general, elasticities measure

   		the change in quantity demanded when a product attribute changes.
   		the change in consumer spending when income changes.
   		the change in an attribute for a percentage change in price.
   		the percentage change in the quantity demanded resulting from a fixed percentage change in some attribute.

3 points

Question 20

1. Average total costs are defined as

   		total costs divided by the change in output.
   		total costs divided by output.
   		the change in total costs when output changes.
   		average variable costs plus marginal costs.

3 points

Question 21

1. If a firm is experiencing economies of scale, then the long-run average cost curve is

   		falling.
   		rising.
   		horizontal.
   		shifting.

3 points

Question 22

1. If average total cost is rising

   		marginal cost is above average total cost.
   		marginal cost is rising.
   		marginal product is rising.
   		marginal cost is above average total cost and is falling.

3 points

Question 23

1. The period of time over which all inputs are variable is the

   		market horizon.
   		short run.
   		calendar year.
   		long run.

3 points

Question 24

1. The supply chain refers to

   		the supply curve.
   		the process of outsourcing.
   		the process of downsizing.
   		the process of creating and selling a product.

3 points

Question 25

1. When the capital (a fixed input) changes

   		short-run marginal costs rise.
   		short-run average total costs fall but do not shift.
   		labor inputs decline.
   		the short-run average total cost curve shifts.

3 points

Question 26

1. A market of price takers is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 27

1. A market with a single seller is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 28

1. A market that mainly stresses product differentiation is called

   		perfectly competitive.
   		monopolistically competitive.
   		a monopoly.
   		an oligopoly.

3 points

Question 29

1. Entry into a competitive market will continue until

   		economic profits are zero.
   		normal profits are zero.
   		when accounting losses are zero.
   		a. and b. are true

3 points

Question 30

1. Firms in an oligopoly

   		act independently.
   		engage in strategic behavior.
   		have perfect knowledge of the behavior of others.
   		openly collude.

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.