ECON2209 Lecture Notes - Lecture 6: Marginal Cost, Isocost, Production Function

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8 Jun 2018

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February 1st

● What is the slope of the budget constraint called?

○ Marginal Ability to Trade (MAT)

● Utility Maximizing Rule

○ MUX/MUY = PX/PY

○ Or

○ MUX/PX=MUY/PY

■ MU per dollar spent on X and MU per dollar spent on Y

● 4. Deriving the Demand Curve

○ Derive demand curve for X

○ Hold constant:

■ I (Income)

■ PY

■ Taste in Preferences

■ Expectations

○ Change PX (OTE) and see how QX at equilibrium changes

○ If a consumer is rational and good is normal, we expect demand curve to be

downward sloping

○ The points on the demand curve, are solutions to the consumer’s economic

problem

○ At those points the consumer is maximizing utility, subject to the budget

constraint. All represent points of equilibrium

● 5. Firm Theory

○ Production

■ Production Function

● Def: Shows a maximum output that can be produced, given the

combination of inputs

● Q = F(K,L)

● K = Capital

● L = Labor

● We also call Q: “Total Product”

■ Marginal Product

● Marginal product of a factor, MPF = ChangeQ/ChangeF

● Ex: Marginal product of Labor, MPL=Change Q/ ChangeL

● Same with K (Capital)

■ Average Product

● APF= Q/F

● Ex: APL = Q/L

● Ex: APK= Q/K

■ Graphically:

● At point A draw a tangent line

● The marginal product of A is the slope of the tangent line to the

production function at point A

● Average product is the slope of the line going through A and O.

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Document Summary

Mu per dollar spent on x and mu per dollar spent on y. At point a draw a tangent line. The marginal product of a is the slope of the tangent line to the production function at point a. Average product is the slope of the line going through a and o. Change px (ote) and see how qx at equilibrium changes. If a consumer is rational and good is normal, we expect demand curve to be downward sloping. The points on the demand curve, are solutions to the consumer"s economic problem. At those points the consumer is maximizing utility, subject to the budget constraint. Def: shows a maximum output that can be produced, given the combination of inputs. Marginal product of a factor, mpf = changeq/changef. Ex: marginal product of labor, mpl=change q/ changel. When mpf is greater the apf, ap is rising and hits a maximum. When mpf is lesser than apf, ap is dropping.

Related Questions

Question 1 If it was impossible to have a comparative advantage, there would be no gains from trade. True False 4 points

Question 2 If the price of Good X is $10 and price of Good Y is $15, the slope of the budget constraint is 1.5. True False 4 points

Question 3 If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed. True False 4 points

Question 4 Suppose that supply is fixed at 100 units and demand is Q = 500 P. A price ceiling of $100 creates a shortage of 400 units. True False 4 points

Question 5 Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. True False 4 points

Question 6 Firms should exit the industry if average costs are greater than marginal costs. True False 4 points

Question 7 If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price. True False 4 points

Question 8 Which of the following choices best illustrates the concept of Adam Smith's invisible hand ? A Vietnamese farmer grows rice; an exporter ships it to the United States, and a grocer in New York sells it to a customer. A fishery's stock of fish becomes depleted due to overfishing as boats from around the world converge. A government regulates a firm to clean up the pollutants it has released as part of its production process. An apartment building is built, which provides much needed housing, on the site of the only playground for children in that town. 4 points

Question 9 Figure: Labor Supply and Welfare Refer to the figure. The budget constraint is: ABC. BD. ABDC. ABD. 4 points Question 10 The price of coffee has increased, yet evidence suggests the demand for coffee has been stable. A possible explanation is that: there has been no change in the supply of coffee. there has been increased use of subsidies in coffee production. wages of workers in coffee production might have decreased. wages of workers in coffee production might have increased. 4 points Question 11 Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized. I only II only I and III only II and III only 4 points Question 12 Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that: France should specialize in producing phones and import computers from Sweden. France should specialize in producing computers and import phones from Sweden. France should produce both phones and computers, and import nothing from Sweden. France should import both phones and computers from Sweden. 4 points Question 13 Potato chips and popcorn are substitutes. A subsidy for potato chips will ______the demand for popcorn and the quantity of popcorn sold will ______. (Table: Barrels of Oil) Refer to the table. What is the total amount of producer surplus (per barrel of oil) earned by all four producers if the market price per barrel of oil is $51? Table: Barrels of Oil Minimum willingness to sell Country a single barrel of oil Country A $32.00 Country B 16.00 Country C 17.25 Country D 56.99 increase; increase increase; decrease decrease; decrease decrease; increase 4 points Question 14 In the market for Good X a necessity good without any good substitutes the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: more heavily on buyers, given that demand is more inelastic than supply. evenly between buyers and sellers. more heavily on sellers, given that supply is more inelastic than demand. more heavily on buyers, given that demand is more elastic than supply. 4 points Question 15 A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do? lobby the Fed to lower interest rates on six-month T-bills buy a futures contract that fixes the dollar cost of 500,000 euros in six months buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans sell a naked option to cover the output spread 4 points Question 16 Which of the following scenarios would cause a speculator to buy low and sell high ? Farmers expect to have a bumper harvest of corn next year. Imports of corn begin to flood the country. The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. The government is expected to subsidize corn production for farmers. 4 points Question 17 In a market with a price ceiling which of the following is TRUE? Buyers and sellers experience unexploited gains from trade. Resources are allocated to their most efficient uses. The supply of goods is sold by the sellers with the lowest costs. The supply of goods is bought by the buyers with the highest willingness to pay. 4 points Question 18 Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise. I is true; II is false. I is false; II is true. Both I and II are true. Both I and II are false. 4 points Question 19 As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its: average cost curve. average product curve. marginal cost curve. marginal product curve. 4 points Question 20 An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. The equilibrium price decreases; the equilibrium quantity increases. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. The equilibrium price increases; the equilibrium quantity decreases.

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ECON2209 Lecture Notes - Lecture 6: Marginal Cost, Isocost, Production Function

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