8 Dec 2015

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University of Toronto Scarborough

MGEA02

Introduction to Microeconomics

Final Exam Guide

PART I – Lecture Key Points Review

PART II – Exam Questions & Answers and Explanations

OneClass

1. Some basic equations for Production and Productivity:

1) Profit = Total Revenue – Total Cost

= TR – TC

2) Q = Industry output

q = one firm’s output

Q =

3) Long-run Production function is a relationship between output and inputs.

Short-run Production function is a relationship only with number of labors

4) Marginal product of labor ( additional output from the additional worker)

MPL =

P.S The Law of Diminishing Marginal Product:

Also called “Law of Diminishing Returns” or “Law of variable Proportions”. The law states that

we will get less and less extra output when we add additional element of an input while holding

other inputs fixed. The marginal product of each unit of input will decline as the amount of that

input increases holding all other inputs constant.

5) Average Product of Labor

APL =

6) Average Cost

AC =

7) Marginal Cost

MC =

=

, where TVC = Total Variable Cost

OneClass

8) Production Function:

Cobb-Douglas Function: K= Capital, L=Labor

9) Short run = period too short for firms to change production capacity (K is fixed in amount)

Long run = period long enough for firms to change plant capacity, and for new firms to enter

industry (or exit)

Very long run = period long enough for technology to change

10) Total Cost = TC = , where is the price of per unit capital, is the price per

unit of labor

= (rental) cost of capital equipment

=cost of labor

In the Short-run,

K is fixed, L is variable.

TC =

= Fixed Cost + Variable Cost

Past Exam Question

A firm in a perfectly competitive constant cost industry produces olives in southern Italy. There are 100

identical firms producing olives in the initial short and long run equilibrium. Total costs in the short run

are given by: TC = q2 + 20q + 256, q ≥ 2 where q is output per day and TC is the total cost per day in

dollars. Each firm has fixed costs of $192 (already included in the TC equation above). The demand

function for olives is given by P = 100 - .03Q.

a). what is the price of olives in this current short and long run equilibrium?

(A) $38 (B) $42 (C) $46 (D) $48 (E) $50

(F) $52 (G) $54 (H) $56 (I) $58 (J) none of the above

b). What is the lowest price above which firms in this industry will just start making some contribution

towards covering their fixed costs of production in the short run?

(A) $8 (B) $22 (C) $26 (D) $30 (E) $36

(F) $38 (G) $40 (H) $42 (I) $44 (J) none of the above

Answer:

a) Q = 100q, given P = 100 – 0.03Q, so we can have

P = 100 – 0.03Q = 100 – 0.03 (100q)

P = 100 – 3q

MC =

Let MC = Demand curve

2q+20 = 100 – 3q

q = 16

OneClass