ECON 2030 Lecture 5: Notes - Chapter 12.docx

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19 Dec 2014

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Practice problems (chapter 12): # 1-3, 7-10, 12, 15. Marginal revenue of third pair: sh (free) Q o: total cost (tc) = explicit + implicit, 2 different types of cost explicit and implicit, explicit costs out of pocket costs; accounting costs. The focus of an accountant is on all the money paid out: implicit costs based on the economist"s perspective, there is something that has been given up when a choice is made. Implicit cost is the accounting benefit of doing the next-best thing: example: starting a corn dog stand. Out of pocket costs (explicit costs) rent, money to pay for supplies, money to pay for labor. Implicit costs what was given up; example: salary of being an economics teacher: marginal cost (mc, marginal cost is the change in total cost from producing one more unit of the good or service. Q o: crucial in determining the amount that should be produced.

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25) Suppose that at Jones & Smith Shoe Factory, the marginal cost of making a pair of shoes is $15 and average variable
cost is $15. For the next pair of shoes produced marginal cost will be ________ $15 and average variable cost will be
________ $15. 25) ______
A) greater than; less than B) less than; greater than
C) less than; less than D) greater than; greater than

26) The added revenue that a firm earns from selling an additional unit of output is: 26) ______
A) marginal revenue. B) total revenue.
C) variable revenue. D) fixed revenue.

27) If a restaurant charges seniors one price and nonseniors another price, the restaurant will apply the marginal
principle: 27) ______
A) once, because the two groups have the same demands.
B) twice, because the two groups have different demands.
C) only to the seniors because they consume the most.
D) by averaging the price charged to both groups.

28) At the market equilibrium, resources are allocated efficiently because:28) ______
A) the price buyers pay accurately reflects the marginal cost of the resources used to produce the good.
B) the price buyers pay is greater than sellers' willingness to sell.
C) the marginal cost of producing another unit is equal to zero.
D) all of the above

29) Suppose that the quantity supplied of cars exceeds the quantity of cars demanded. We would expect that: 29)
______
A) the demand will decrease to meet the supply.
B) the price of cars will increase.
C) the supply will increase to meet the demand.
D) the price of cars will decrease.

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A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

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

1. In a market economy, the high salaries of some star baseball players such as Adrian Gonzalez, are determined by

		Team owners, based on the total number of star athletes they plan to hire.
	B	advertising companies, based on what they are willing to pay to advertise their products at baseball games.
	C	the interaction of the demand for star athletes and the supply of star athletes.
	D	consumers, based on their willingness to watch baseball games.

2. Demand in factor markets differs from demand in product markets in that

	A	the demand for a factor of production is difficult to determine.
B		the demand for a factor of production is influenced by workers' productivity and by the producers' expected sales revenues, not by tastes and preferences of consumers.
C		demand for a factor of production is based on the tastes and preferences of firms.
D		demand for a factor of production is based on the tastes and preferences of resource owners.

3. The demand for labor is described as a derived demand because

A		it is derived by workers seeking to earn income to fund the consumption of goods and services.
B		it is derived by producers seeking to make profits by starting new businesses.
C		it is derived from the demand for products that use labor in the production process.
D		it is derived from government institutions that rely on labor markets for the purpose of raising tax revenue.

4. Which of the following is not an example of a derived demand?

A		Several of the animated films released between 1999 and 2001 failed to earn a profit, which caused some companies to stop making these films, thereby decreasing the demand for animators.
B		Seth Bullock, a personal injury attorney, complains that he is earning far less now than a few years ago largely because personal injury cases have been undercut by state laws limiting class-action suits and payouts on damages.
C		Millicent Manning, the owner of a furniture store, is concerned that her sales have fallen for the past six months. She attributes this to the downturn in the real estate market.
D		As advancements in medical technology increase the safety and success of laser eye surgery, the demand for opticians has decreased.

5. Marginal revenue product for a perfectly competitive seller is equal to

A		the output price multiplied by the total product of labor.
B		the output price multiplied by the number of workers hired.
C		the change in total revenue that results from hiring another worker.
D		the marginal cost of production.

6. What is the difference between labor's marginal product and marginal revenue product?

A		The marginal product of labor is the increase in output as a result of hiring an additional worker while the marginal revenue product of labor is the increase in profit as a result of hiring an additional worker.
B		The marginal revenue product of labor is the dollar value of hiring an additional worker while the marginal product of labor is the increase in the firm's physical output as a result of hiring an additional worker.
C		The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
D		Labor's marginal product is a measure of labor's productivity while labor's marginal revenue product is a measure of labor's ability to sell the firm's products.

7. What is the difference between a firm's marginal revenue and its marginal revenue product?

A		Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the profit earned from hiring one more worker.
B		Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the change in total revenue from hiring one more worker.
C		Marginal revenue is the increase in revenue when a firm raises its output price while marginal revenue product is the increase in the marginal product when a firm hires an additional worker.
D		There is no difference between the two terms.

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ECON 2030 Lecture 5: Notes - Chapter 12.docx

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