EC120 : Factors of Production Notes.docx

Assume that apples are produced in a perfectly competitive market. Columbia’s Orchard is a typical firm that grows and sells apples. Currently, Columbia earns zero economic profit, and the market price of apples is $10 per bushel.

a) Draw a correctly labeled graph showing Columbia’s demand curve, average total cost curve, and marginal cost curve, and show the profit-maximizing quantity, labeled Qc.

b) Suppose an increase in the popularity of apple, the demand for apple increases.

How will the increase in the demand for apples affect Columbia’s economic profit in the short run? Explain.

c) What will happen to Columbia’s economic profit in the long run? Explain.

A. A competitive firm

1. can consider only its location in setting the price.
2. must base its competitive price on product differentiation.
3. has the ability to set its own price.
4. must accept the price determined by the intersection of the market supply and demand curves.
5. has no supply curve.

B. If a firm is making an economic profit, then

1. the factors of production are being paid their opportunity costs.
2. there will be no change in the number of firms if the industry is perfectly competitive.
3. the factors of production are being paid less than their opportunity costs.
4. the factors of production are being paid more than their opportunity costs.
5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

1. marginal revenue is greater than price.
2. the elasticity of demand is constant.
3. marginal revenue decreases when the price decreases.
4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

1. shut down because economic profits are negative.
2. continue to produce as long as P > AVC.
3. continue to produce because accounting profits are positive.
4. set a higher price for its output.
5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

1. the marginal revenue curve.
2. perfectly inelastic.
3. always equal to marginal cost.
4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

1. monopolistic
2. oligopolistic
3. monopolistically competitive
4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

1. total revenue will fall if the price increases.
2. total revenue will be unchanged if the price increases.
3. total revenue will rise if the price increases.
4. the total supply will increase by an equal amount if demand increases.
5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

1. monopoly.
2. perfect competition.
3. theories of consumer behavior.
4. imperfect competition.
5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

1. perfect competition
2. monopolistic competition
3. oligopoly
4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

1. economic profits are zero.
2. TR > TC.
3. TR < TC.
4. P = AVC.
5. normal profits are zero.

1. Marginal resource cost is

A) the increase in total resource cost associated with the production of one more unit of output.

B) the increase in total resource cost associated with the hire of one more unit of the resource.

C) total resource cost divided by the number of inputs employed.

D) the change in total revenue associated with the employment of one more unit of the resource.

2. Which of the following increases in labour demand is due to a change in the price of a related resource?

A) Software sales rise, thus increasing the demand for software developers.

B) Snowboarding increases in popularity, thus increasing the demand for the workers who make snowboards.

C) A decrease in the price of wood decreases the cost of furniture, thus increasing the demand for furniture workers.

D) A technological change increases output per worker in the computer industry, thus increasing the demand for computer workers.

3 The labour demand curve of a firm

A) will shift to the left if the price of the product the labour is producing falls.

B) is perfectly elastic if the firm is selling its product in a purely competitive market.

C) reflects a direct relationship between the number of workers hired and the money wage rate.

D) is the same as its marginal product curve.