ECON 102 Chapter Notes - Chapter 7: Marginal Product

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12 Apr 2016

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Firms demand factors of producion and supply goods and services. 3 decisions irms must make: how much output to supply, how to produce that output, how much of each output to demand. Proit = total revenue total cost: total revenue = amount received from the sale of the product = number of units sold x price per unit. A ixed scale (ixed factors of producion) some factor locks them into their current scale of operaions. No entry or exit from the industry: long run. Producion funcions = relaionship between inputs and outputs expressed mathemaically. Marginal product = the addiional output that can be produced by hiring one more unit of a speciic input, holding all other inputs constant. Law of diminishing returns/diminishing marginal product = ater a certain point, when addiional units of a variable input are added to ixed inputs, the marginal product of the variable input declines.

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Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The objective of a firm is to maximize profits. In determining output, the firm may be subject to two constraints: costs of production and consumer demand. The price that a perfectly competitive firm may sell its products, is determined by consumer demand. Production costs are determined by the technology used. Profits are the difference between total revenues and total costs. Pertaining to short-run profit maximization, firms maximize profits by choosing the output level where its marginal revenue equals its marginal cost.

Farnham, P. G. (2014). Economics for Managers (3rd Ed.).

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32. Which of the following is not a difference between monopolies and perfectly competitive markets?

A. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

B. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost.

C. Monopolies can earn profits in the long run while perfectly competitive firms break even.

D. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not.

40. Which of the following statements is not correct?

A. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.

B. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.

C. Only competitive firms produce the welfare-maximizing level of output.

D. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

43. A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that

A. the profits of the firm are negative.

B. firms are likely to leave this market in the long run.

C. the firm is currently maximizing its profit.

D. All of the above are correct.

Firm z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q +2Q^2. The associated marginal cost is MC = 4 +4Q, and the point of a minimum average cost is Qmin = 5.

a. Determine the firm's profit-maximizing level of output. Compute its profit.

b. The industry demand curve is Q = 200 -5P. What is the total market demand at the current $16 price? If all firms in the industry have cost structures identical to that of firm Z, how many firms will supply the market?

c. The outcomes in parts a and b cannot persist in the long run. Explain why. Find the market's price, total output, number of firms, and output per firm in the long run.

d. Comparing the short-run and long-run results explain the changes in the price and in the number of firms.

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ECON 102 Chapter Notes - Chapter 7: Marginal Product

ECON 102 Full Course Notes

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