ECON1101 Lecture 9: ECON1101 Week 4 Lecture B

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whitegoat396

30 May 2018

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ECON1101 Week 4 Lecture B

● Read chapter 6

●

Market Demand

Market Supply

Linked to

Consumers

Firms

Who maximise

Utility

Profits

Constraints by

budget/income

Production function

Slope of curve due to

Decrease of marginal

benefit or marginal utility

Increase marginal cost

Gains from trade

Consumer surplus

Producer surplus

● Firm: an organisation that produced goods or services e.g. farms, bmw

● Labour components of firm:

○ Workers/employees: usually paid a fixed wage or salary and told what to

○ Managers: make decisions and monitor workers

○ Owners: Fund firm’s investments and bear financial risks uses financial

capital to purchase physical capital

● Why do firms exist?

○ To minimise transaction costs

○ Individual contracts unwieldy with team production

○ Difficult or costly to specify complete contracts

○ We assume firm’s goal is to maximise profit

● Competitive markets:

○ We’ll assume competitive markets:

■ No firm can influence market price firms are price-takers

■ Profit = revenue - cost

■ Revenue = price x quantity

● Production:

○ Production = a process that transforms inputs into outputs

○ Inputs = production/technology > outputs <- represent with a production

function

○ Output (Q = F(L.K) <- L = labour input K= capital input

○ Depending on tie horizon, not all inputs can be varied some may be fixed

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Document Summary

Firm: an organisation that produced goods or services e. g. farms, bmw. Workers/employees: usually paid a fixed wage or salary and told what to do. Owners: fund firm"s investments and bear financial risks uses financial capital to purchase physical capital. Difficult or costly to specify complete contracts. We assume firm"s goal is to maximise profit. No firm can influence market price firms are price-takers. Production = a process that transforms inputs into outputs. Inputs = production/technology > outputs rent = /day. L: labour - variable input -> wage rate = /hr. Marginal product of labour (mp): additional output from additional (or last) unit of labour.

Related Questions

Please circle the right answer. (two points each)

1. If the price of gasoline is $2.0, and the price elasticity of demand is 0.5, how much will a 10 % reduction in the quantity placed on the market increase the price?

a.There will be 22% increase in the price

b.There will be 5% increase in the price

c.There will be 10 % increase in price

d.There will be 20% increase in price

e. None of the above

2.The consumer's budget line

a. indicates the options from which the consumer can choose

b. identifies the optimal basket for the consumer.

c. identifies the tastes of the consumer

d. ranks the baskets of goods in the order the consumer prefers them

e. shows that the consumer prefers more better than less

3. In the long run, a profit-maximizing firm will choose to exit a market when
a. fixed costs exceed sunk costs.
b. average fixed cost is rising.
c. revenue from production is less than total costs.
d. marginal cost exceeds marginal revenue at the current level of production.

4. When a perfectly competitive firm makes a decision to shut down, it is most likely that
a. price is below the minimum of average variable cost.
b. fixed costs exceed variable costs.
c. average fixed costs are rising.
d. marginal cost is above average variable cost.

5. Which of the following will always cause the demand curve for a product to shift to the right?

a. an increase in income whether the good is a compliment or substitute

b. an increase in the price of the compliment

c. an increase in the price of a substitute

d. an increase in technology

e. a decrease in the price of the good

6. Consumers understandably like lower prices, but they should understand there is a great difference between a lower price produced by the government price ceiling and a lower price that comes about through normal market channels, one benefits the consumer, the other may not.

a. This statement is not true, Consumers are benefited when the government lowers the price and the consumers are benefited when businesses lower the price.

b. This is because when the government forces prices down, there is a shortage and reduction in total surplus. Lower prices through markets don't create shortage but they do benefit consumers.

c. this is because the government forces prices down, there is a surplus and reduction in total surplus. Lower prices through markets don't create surpluses but they do benefit consumers

d. This is because when markets force the prices down, there is a shortage and reduction in total surplus. Lower prices through government actions don't create shortages but they do benefit consumers

e. None of the above

7. How does an increase in the price of a variable input affect the AC and the MC curves?

a. MC shifts to the right and AC increases.

b. MC shifts to the left and AC increases

c. MC shifts to the right and AC does not change

d. MC does not change but AC increases

e. none of the above

8. Which of the following is a characteristic of a perfectly competitive market?
a. Firms are price setters.
b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of the above are correct.

9. In a perfectly competitive market, the process of entry or exit ends when
a. firms are operating with excess capacity.
b. firms are making zero economic profit.
c. firms experience decreasing marginal revenue.
d. price is equal to marginal cost.

10. The relative price of two goods is shown by:

a. the slope of an indifference curve

b. the slope of the budget line

c. the diminishing marginal rate of substitution

d. the slope of the income-consumption curve

e. none of the above

11. When firms have an incentive to exit a competitive market, their exit will

a. drive down market prices.
b. drive down the profits of existing firms in the market.
c. decrease the number of goods supplied in the market.
d. All of the above are correct.

12. If a perfectly competitive firm currently produces where the price is greater than the marginal cost, it

a. will increase its profits by producing more.
b. will increase its profits by producing less.
c. is making positive economic profits.
d. is making negative economic profits.

13. Does a consumer well being vary along a demand curve?

a. Yes. When price increases, consumers move to a lower indifference curve.

b. Yes. When price increases, consumers move to a higher indifference curve.

c. No. When price increases, consumers stay on the same indifference curve.

d. No. When price increases, the higher price has no effect on budget constraints or indifference curves.

e. None of the above

14. If a competitive firm sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:

a. Negative

b. positive

c. Zero

d. Indeterminate from the given information

15. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.

b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of the above are correct.

tanchinchilla75

A consultant has advised Consolidated Fish, Inc., a perfectly competitive firm, that it should cut back its production in order to increase its profits. We can conclude from this that

CF's total costs must be greater than its total revenues.

CF's marginal cost must be greater than the price of its product.

CF's costs are increasing at a rate less than its revenues.

fixed costs are not being covered and CF should shut down.

If marginal cost is equal to marginal revenue

the firm should hold output constant.

the firm should expand output.

there is no way to determine if the firm should expand output, contract output, or hold output constant.

the firm should contract output.

Which statement is true?

The minimum point on the firm's marginal cost curve is the shutdown point.

The minimum point on the firm's average variable cost curve is the shutdown point.

The minimum point on the firm's average total cost curve is the shutdown point.

The minimum point on the firm's marginal cost curve is the break-even point.

As output expands beyond the break-even point, the vertical distance between the AVC and ATC will

remain constant.

get smaller.

get larger.

Total revenue divided by output equals

average variable cost.

marginal cost.

price.

average total cost.

A monopoly firm selling mustache wax to vain men in a small town is currently maximizing profits by charging a price of $5. It follows that the marginal cost of mustache wax

is equal to $5.

is greater than $5.

is less than $5.

None of these choices are true.

A firm can sell 14 units at $18, but to sell 15 units, the firm must cut the price to $17. The marginal revenue derived from selling the 15th unit is

-$18

$17

If total revenue is increasing as output is rising, then

marginal revenue must be greater than zero.

marginal revenue must be less than zero.

marginal revenue must be equal to zero.

price must be increasing.

Firms that had virtual monopolies, that is control over at least 80 percent of industry production, because of control over an essential resource include all of the following except

the DeBeers Diamond Company.

the Standard Oil Company.

the Ford Motor Company.

the International Nickel Company.

10.

Which statement is true?

None of these statements are true.

Most natural monopolies are government regulated or government owned.

All monopolies are bad.

All monopolies are good.

11.

Which is the most accurate statement?

There are virtually no oligopolies in the U.S.

The most important aspect of oligopoly is product differentiation.

There are a whole range of oligopolistic models, from a cartel to cutthroat competition.

An oligopolistic industry cannot have more than five firms

12.

Oligopolists have more control over prices than monopolistic competitors because

their prices are always set by the government.

since an oligopolist is the only competitor in the market, setting prices is no problem.

they can legally collude whereas monopolistic competitors may not.

with fewer competitors, they are able to monitor and determine their own prices much easier.

13.

The definition of monopolistic competition differs from that of perfect competition

in neither the number of firms nor the type of product.

in both the number of firms and the type of product.

with respect to the type of product.

with respect to the number of firms in the industry.

14.

The typical monopolistic competitor

may compete on the basis of physical differences, convenience, service, and ambience.

always competes on the basis of producing a product that is physically different from those of its competitors.

never uses price discrimination.

is a large firm.

15.

Which statement is true?

The monopolistic competitor may make a profit in the long run.

The monopolistic competitor has a perfectly elastic demand curve.

None of these statements are true.

The monopolistic competitor operates at the minimum point of her ATC curve.

16.

Which statement is true about the monopolistic competitor in the long run?

It will be breaking even.

It will be making a profit.

It may be making a profit or taking a loss.

It will be taking a loss.

17.

Which statement is true?

Most monopolistic competitors are large firms.

Monopolistic competitors produce goods or services for which there are no close substitutes.

None of these statements are true.

Monopolistic competitors usually operate at the minimum point of their average total cost curves.

18.

Which statement is false?

As the price of a good rises the consumer surplus decreases.

A person would maximize her total utility when she had no consumer surplus.

We will consume a service when its marginal utility is equal to its price.

A product's utility to a buyer is measured by how much the buyer is willing to pay for it.

1. The Houston Chronicle reported that in Houston, the average price of new homes has decreased, while at the same time, the number of new homes sold has increased. This situation could be explained by which one of the following: (draw curves before answering)

An Increase in demand
An Increase in supply
A Decrease in demand
A Decrease in supply

2. In another market, the average price of new homes fell, while at the same time, the number of new homes sold decreased. The situation would best be explained by (Draw the curves before answering)

An Increase in Demand
An Increase in Supply
A Decrease in demand
A Decrease in supply

3. A consumer is said to have achieved maximum total utility when:

Purchases of Good A give the same satisfaction as purchases of Good B.
Purchases of the last dollar spent on Good A give the same satisfaction as purchases of the last dollar spent on Good B.
The average purchases per dollar of Good A give the same satisfaction as the average purchases per dollar of Good B.
The total utility derived from Good A is the same as the marginal utility derived from Good B.

4. You are given the following information about a firm's present output position: MPP (Marginal Physical Product) of Land = 12; MPP of Labor = 16; Price of Land = $2; Price of Labor = $4. With no additional money to spend, this firm should:

5. A firm achieves the least cost in production by substituting factors until

their factor prices are equal
their marginal products are equal to the factor prices
their marginal products are each equal to zero
the ratios of their marginal product equal the ratio of their prices
none of the above

6.The economy is currently on its production possibilities frontier (PPF). A politician says that it is possible to get more of everything--more infrastructure, more schools, more national defense, more spending on social programs, and so on. The politician is

correct if he is assuming a rightward-shifting PPF.
incorrect if he is assuming a rightward-shifting PPF.
correct if he is assuming a PPF that does not change.
none of the above

7. Assume your swimsuit business is at its maximum profit position, and one new change occurs: consumer incomes decrease. If swimsuits are normal goods, the equilibrium price of swimsuits will __________, and the CONSUMER surplus will ________.

increase, increase
decrease, decrease
increase, decrease
decrease, increase

8. Firms that shuts-down in the short-run still must pay:

Marginal cost
Variable cost
Fixed cost
Total cost

9. The term externalities refer to:

Black-market economic activity.
The impact on markets of imported goods.
The costs and benefits of a market activity borne by a third party.
The inequitable distribution of income.

10. If full external costs are not internalized, firms will tend to allocate more of society's scarce resources to produce than is societally warranted, and if full external benefits are not internalized, firms will allocate less of society's resources to produce than is societally justified. True/False.

11. Joe was very careful about smoking in his home until he bought a fire insurance policy. After buying the policy, he became careless. His attitude is: "I'm insured. What do I care if this place burns down; I'll just collect the money". Joe's attitude is an example of ______________.

12. Megatrust Bank had historically scrutinized loans very carefully and extended them, only to persons whom they considered very creditworthy. They made relatively few loans. However, after the government provided guarantees to sub-prime loans, Megatrust relaxed its standards and increased its loan volume. (And its default rate as well.) This is an example of _______________.

13. In the short-run, if a perfectly competitive firm finds itself operating at a loss, it will

Reduce the size of its plant to lower fixed costs.
Raise the price of its product.
Shut down.
Continue to operate as long as it covers its variable cost.

14. If income today is more equally distributed than it was in 1960, a Lorenz Curve depicting today's distribution would be

More bowed and to the left of the 1960's curve.
More bowed and to the right of the 1960's curve.
Less bowed and to the left of the 1960' curve.
Less bowed and to the right of the 1960's curve.

15. Which of the following statements is true?

As output increases, the average fixed cost becomes smaller and smaller.
Average fixed cost does not change as output increases.
The marginal cost curve intersects the average fixed cost curve at its minimum point.
When marginal cost is greater than average fixed cost, average fixed cost increases.

16. A firm in any of the market structures we have studied will maximize its profit (or minimizes its loss) when its

Average costs are at a minimum
Marginal revenue and marginal cost are the same.
Marginal revenue is less than marginal cost.
Marginal revenue is zero.

17. If the demand for a good increase, when the price of other good increases, these goods are

Capital goods
Substitute goods
Complementary goods
Luxury goods

18. Which of the following pairs of products are complementary goods?

mobile phones and laptops
pens and pencils
sugar and artificial sweeteners
radios and television
toothbrushes and toothpaste

19. The amount of a good that is given up to produce another good is:

Scarcity
Specialization
Opportunity cost
Trade
Efficiency

20. The most important characteristic of the equilibrium price is that it:

Guarantees that producers earn a profit.
Increases the quantity demanded.
Clears the market.
Decreases the quantity supplied.

21. Rank the following market structures based on the number of participating firms: From the fewest number of firms to the most number of firms:

Oligopoly
Perfect Competition
Monopoly
Monopolistic Competition

22. If firms in a monopolistically competitive market are earning economic profits which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?

an increase in demand
a decrease in demand
a downward shift in their marginal cost curve
an upward shift in their marginal cost curve

23. If labor in Mexico is less productive than labor in the United States in all areas of production,

neither nation can benefit from trade
Mexico can benefit from trade but the United States cannot
Mexico will not have a comparative advantage in any good
both nations can benefit from trade

24. Which of the following statements is false?

The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
Monopolistically competitive firms advertise to increase the elasticity of the demand curve they face.
Expensive advertising might help consumers if it is a signal that the product is good.
Brand names acquired at great cost might help consumers by assuring quality.

25. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigs in surrounding states. Which of the following principles does this best illustrate:

people respond to incentives
rational people think at the margin
a trademark can make everyone better off
markets are usually a good way to organize economic activity

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ECON1101 Lecture 9: ECON1101 Week 4 Lecture B

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